When you’re in your 20s, the world’s your oyster—but it’s also the ideal time to create a solid foundation for your financial future. But advice for how much money to have saved by the time you turn 30 varies widely. For example, Fidelity recommends having a full year’s salary in the bank; T. Rowe Price suggests a less daunting benchmark—you should have half your salary saved by the time you turn the big 3-0. But there are a lot of factors (student loans, for example) that impact the amount you can set aside. So, what’s the right number for you? Here’s how to break it down into more attainable goals and actually save.
1. Have Three to Six Months of Fixed Expenses Set Aside
According to Emily Shallal, senior director of consumer strategy and innovation for Ally Bank, you should always have at least three months of income sitting in your savings account for emergencies. This is in case you experience a sudden loss in income—so you can cover non-optional costs like rent or mortgage, utilities and groceries. As part of that, she recommends housing your cash in a high-yield savings account. (Desirable interest rates are currently topping out at around 1 percent.) Keep in mind that interest rate alone won’t help you meet your savings goals, but it will give you a boost.
2. Save 15 Percent of Your Income for Retirement Goals
A thoughtful investment strategy is a critical part of achieving long-term wealth, which is why—as a next step behind your emergency fund—you’ll want to use an online retirement savings calculator to pinpoint how much you should be setting aside in your 401(k) or a traditional IRA. Per the The Washington Post, 15 percent of your annual pretax income should go toward retirement. This number accounts for evolving market conditions and also the fact that you may want to retire earlier than 65. (Hey, you’re in your 20s—a lot could happen between then and now.)
If you can’t afford to set aside this amount, that’s OK. You should still aim to invest enough to meet any employer matches (which can be as high as 50 percent), then make it a goal to increase your retirement savings by 1 percent every year—assuming you get an annual raise—until you hit 15 percent.
3. Double Down on Your Savings Goals
Shallal says that it’s all too common to take an expenses-first approach to savings. But, at this age, it could be worthwhile to focus first on what you want to save for and then see what you have left for your expenses. Ask yourself: Do your savings goals include a fancy wedding? A house? A ton of international travel? Plan your savings strategy accordingly, by calculating the amount you’ll need and then making a plan for how much to set aside each paycheck to get there.
You can take advantage of technology, by nicknaming accounts with things “dream house” or “honeymoon.”
4. And If You Set Aside a Full Year’s Salary, Crunch the Numbers Early
Yes, Fidelity’s recommendation is certainly aspirational. But before you get overwhelmed, it’s important to recognize that achieving it requires breaking it down into bite-size annual goals. Say you make $50,000 annually — what are the odds that you can sock away 10 percent of that income every year? Look at what that breaks down to per biweekly paycheck. (Since 10 percent of $50,000 is $5,000, that means you’ll need to automate $96 a week to hit your mark by year’s end.) Follow that strategy for 10 years and you’ll have hit your goal.