As a twentysomething, I'm not someone most people expect to have a lot of financial wisdom or regrets. After all, I've been in the workforce for only a little more than a decade. What could I have possibly learned or messed up in that time that would be of any significance?
I won't sit here and tell you I know it all. I'm definitely still learning, and I don't think that I'll ever stop. But I've picked up a few things over the years that I wish I could go back in time and tell my younger self and that might be useful to others too, regardless of your age. Here are three of them.
1. Saving for retirement early can save you money over the long run.
I opened my first retirement account at 20, but I only contributed to it haphazardly throughout my early 20s, and there were a few years I didn't contribute anything to it at all. I put my extra cash in savings or spent it on things I wanted. But in hindsight, I wish I'd been more diligent about putting away money for my future, not just to make sure I could enjoy a comfortable retirement, but also to save myself money in my later years.
Your early retirement contributions matter a lot more than your later ones because they have more time to grow. When you wait to start saving for retirement, time isn't on your side as much and you'll have to set aside more of your own money each month to end up with a comfortable amount in the end.
Consider the following example. You want to save $1 million for your retirement. This may or may not be enough, depending on your life expectancy and retirement goals, but for the sake of round numbers, let's say that it is. Your goal is to retire at 65. If you'd begun saving diligently at age 20, you'd only have to set aside about $292 per month to hit your goal, assuming a 7% annual rate of return. If you'd waited to start saving until 25, now you'd have to set aside about $418 per month with the same rate of return. And if you'd waited until 30 to begin, you'd have to save about $603 per month to have enough.
To get to $1 million over the course of your career, you'd put away $253,260 of your own money if you began saving at 30, but just $200,640 if you began at 25 and $157,680 if you began at 20. By neglecting your retirement savings when you're young, you, like me, end up costing yourself money later on in your life and make saving for retirement more difficult than it has to be.
2. A savings account isn't always the best place for your savings.
Growing up, I was taught the importance of saving and I've always been good at it. But it wasn't until I was in my mid-20s that I began to realize that a savings account might not be the best place for all my extra cash. Don't get me wrong. A savings account is a great place to put money for your emergency fund or for large purchases you intend to make within the next five years or so. But it's not your best choice for longer-term savings.
Even the top high-yield savings accounts offer only around a 2% annual percentage yield. Inflation, by contrast, has eroded the value of the dollar by about 3% per year historically. That means money you keep in a savings account will lose value over time.
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Investing is your way around that, and it's what I do now with my savings that I'm not reserving for any other special purpose. It's easy to get started with a robo-advisor even if you don't know anything about investing, and if you lack the time or interest to learn more about investing, you can always consult a financial advisor who can help you choose the right investments for your goals.
3. It takes more than money to make you feel financially secure.
Before I entered the workforce, I always thought that all it took was a steady paycheck and a comfortable amount in your bank account to feel financially secure. Then I started working and found that no matter how much I had saved, I was always unsure whether I had enough to handle my future expenses and whatever unplanned costs might arise. Sometimes I felt too paralyzed to let myself spend money on the things I wanted.
I was missing a key ingredient that has made all the difference -- a plan. When you don't understand what you're saving for or how much you need, you'll never know if you're actually on track and you'll just end up worrying about whether you have enough. But when you sit down and craft a budget that includes your long-term savings goals, like retirement, buying a home, or travel, you can rest a little easier knowing that if you hit your monthly savings goals, you can spend the rest of your cash as you choose.
Sometimes when you crunch the numbers, you'll realize you were worried for no reason and other times, you'll realize you're off track. But knowing that is the first step to correcting the problem. Once you figure out what you need, you can look for ways to balance your budget, like cutting back spending or extending the timeline for your goals so you don't have to save as much per month.
You don't have to do this alone, either. If you don't trust yourself to manage your money on your own, you could ask a knowledgeable family member or friend to help you or enlist the services of a financial advisor. He or she will be able to help you identify and prioritize your goals and figure out the best methods to save for them.
I know I'm not the only person who has made some of these mistakes, and hopefully by sharing my story, I can stop a few people from following in my footsteps. No matter your age, you should take the time to develop a plan for your savings and then figure out the best place to put that money to maximize your net worth. Trust me -- you won't regret it.
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