14 Smart Money Decisions Twenty-Somethings Can Make Now for Retirement

At 20 years old, you might think of retirement as a distant reality. But here’s the thing — starting your retirement savings now can be a game changer in the long run. The sooner you begin, the more time your money has to grow. Even if you feel strapped for cash, there are several things you can do now to help you achieve your money goals for retirement.

14 Smart Money Decisions Twenty-Somethings Can Make Now for Retirement

1. Start a Retirement Fund

Consider opening an individual retirement account (IRA) or, if your employer offers it, contribute to a 401(k). A 401(k) often comes through your job, where you can save a portion of your paycheck before taxes. Some employers will even match your contributions up to a certain percentage.

On the other hand, an IRA is something you set up on your own. It gives you two options — traditional and Roth. With a traditional IRA, you contribute personal savings that are tax-deductible. A Roth IRA is one you fund after-tax dollars, meaning your withdrawals in retirement are tax-free.

Even if you can only spare a small amount each month, it’s worth it. Over the years, small contributions grow into something more, setting you up for retirement when the time comes.

2. Create a Budget

Budgeting may sound like a chore to some, but it’s actually your key to unlocking financial freedom. Many look at budgeting as a restriction, but there’s more to it than that. It helps you understand where your money goes so you can make better financial decisions.

Start simple. Track your income and expenses for a month to see where your money is going. You may be surprised how those small, everyday purchases add up. Next, categorize your expenses into “needs” and “wants.”

This next step is where you can set goals and use your budget as a tool to help you get there. Use apps to keep everything organized. Many of them can connect to your bank accounts and categorize expenses automatically, which can be a huge time-saver.

3. Invest in a Health Savings Account

Think of a health savings account (HSA) as more than a rainy day fund for medical expenses but as a savvy investment tool for your future. If you have high-deductible health insurance, you can open an HSA — and here’s why you should consider it. 

First off, you get the triple tax advantage. This means your contributions are tax-deductible, the financial growth is tax-free and withdrawals for medical expenses are also tax-free. This makes HSA a powerful tool for current health expenses and future needs.

To make the most of an HSA, contribute to it regularly. Many employers may supply a portion toward your HSA, which is free money towards your health and retirement savings.

Use your HSA funds for everything from prescriptions to doctor’s visits. What you have left over by the end of the year rolls over to the next, accumulating over time. Once you reach age 65, you can withdraw funds for any purpose without penalty, though you’ll pay taxes on withdrawals not used for medical expenses.

4. Build an Emergency Fund

Life is full of surprises, and sometimes they’re the fun kind. But other times call for an emergency fund for those “just in case” moments. Whether it’s a sudden job loss or a major car repair, an emergency fund can keep you afloat without derailing your financial goals.

Starting this funding is simpler than you think. Aim to save up to three to six months’ living expenses. While it sounds like a lot, even a small amount set aside each month can quickly build up. Start with a goal of $1,000 and grow from there.

5. Learn About Investing

Understanding how to grow your money is crucial for securing your financial future. The good news is that you don’t have to be a Wall Street expert to get started. The key is to begin with the basics and build your knowledge over time.

Start by exploring different types of investments — stocks, bonds, mutual funds and exchange-traded funds (ETFs). Each has its own level of risk and potential return, so it’s important to understand their pros and cons.

To further solidify your long-term financial strategies, it’s useful to explore different avenues of investment. When considering physical assets, comparing gold coins to gold bars can offer insightful perspectives on asset performance and market behavior. Ensuring diversity in your portfolio by mixing both can help safeguard against economic volatility.

6. Pay Off High-Interest Debt

High-interest debt — like credit card balances — can feel like a financial anchor, holding you back from your monetary goals. But tackling this debt head-on is one of the smartest moves you can make in your 20s.

Why focus on high-interest debt first? It’s simple — it costs you more. The longer you carry this debt, the more you pay in interest, which inflates the total amount you owe. Prioritizing these debts for repayment can save you a lot of money in the long run.

Here’s how to get started:

• Write down everything you owe from the highest to lowest interest rate.
• Adjust your budget to allocate more money towards paying off high-interest debts first.
• Consider the snowball or avalanche methods. The snowball method involves paying off your lowest debts and moving on to larger ones. The avalanche method is the opposite, where you first pay debts with the highest interest rates.
• Find ways to reduce expenses or increase your income to make extra debt payments. 

7. Increase Retirement Savings Gradually

Start by setting a baseline — how much are you currently contributing to your retirement accounts? Even if it’s a small percentage of your income, that’s your starting point. Now, make a plan to increase that contribution by:

• Scheduling increases: Plan to raise your contribution rate by 1% or more each year. Consider aligning this with a salary increase or after paying off a debt.
• Take advantage of raises: Commit to directing a portion of any future raises, bonuses or tax refunds directly into your retirement savings. This way, you boost your savings without impacting your existing budget.
• Use automation: Most retirement plans allow you to set up automatic increases. This way, you won’t have to remember to adjust your contributions — it’s done for you.

The beauty of this strategy is it leverages time and compound interest, turning those small additions into significant growth by the time you retire. By incrementally increasing your savings, you’re easing into a more secure future without feeling a pinch on your current lifestyle.

8. Diversify Investments

Avoid putting all your eggs in one basket and consider spreading your investments. This strategy is essential for anyone looking to balance risk and reward. It reduces the risk of greater losses if one investment performs poorly. Investments react differently to the same economic events, so diversification is beneficial for offsetting higher levels of risk. 

While diversification won’t eliminate risk, it helps manage it. Rather than relying on a single investment’s performance for financial success, you get a more stable and sensible way with this approach to investing. 

Remember, the goal of diversification isn’t necessarily to maximize returns but rather to limit the impact of volatility on your portfolio. As with any investment strategy, it’s wise to consult with a financial advisor to tailor your approach to your financial situation and goals.

9. Automate Savings

One of the most foolproof ways to ensure you consistently save for your future is to automate the process. Automation takes the guesswork out of saving by transferring a set amount of money to your savings account. As such, you can build your savings without even thinking about it. 

Most banks and financial institutions offer easy options to set up these transfers, and you can specify the frequency and amount. This strategy simplifies your financial management while reinforcing good saving habits by making it a regular part of your routine. 

As your financial situation improves, consider increasing the amount you automate. This gradual escalation will boost your savings over time, proving that sometimes, the best way to save is to make it an automatic part of your life.

10. Take Advantage of Compound Interest

Compound interest is an effective strategy for growing your wealth over time. Financial experts call this “interest on interest” because it allows the initial principal and the accumulated interest to earn more. When you make small investments consistently, you can turn those contributions into substantial sums over the long term. 

Leverage compound interest fully by saving and investing as early as possible. The longer you invest, the more time it has to grow exponentially. Additionally, reinvesting dividends from stocks or mutual funds can further fuel your investment growth. Utilizing compound interest sets a foundation for financial safety, proving that time can indeed be money.

11. Save Windfalls

Receiving a windfall feels like hitting a mini-jackpot because you gain a certain amount of money unexpectedly. It could be your tax refund, a bonus or an inheritance. While it’s tempting to splurge on life’s pleasures, smartly allocating these funds can boost your financial future. 

Treat any windfall as an opportunity to strengthen your financial foundation by:

• Paying down debts.
• Topping up your emergency fund.
• Increasing your investments.

If you’re debt-free, consider using a portion of this money to max out your IRA or add to your HSA, taking advantage of tax benefits while preparing for your future needs. Alternatively, you could invest in a personal learning opportunity or upgrade something that contributes to your life.

Whatever you choose, make sure a portion of your windfall goes toward long-term savings or investments. Doing so will solidify your financial stability and move you closer to your major goals.

12. Understand Your Retirement Needs

Knowing how much you’ll need for a comfortable retirement is key to setting realistic savings goals. Start by picturing what your ideal retirement looks like to you. Do you see yourself traveling or moving to a beach town? Once you have a picture of your desired lifestyle, you can calculate how much it will cost.

Use online retirement calculators to estimate how much you need to save based on your age, income, expected retirement age and lifestyle aspirations. These tools factor in variables like inflation and potential medical costs, providing a more comprehensive view of future needs. It can be a good idea to talk to estate planning experts who can advise you on what you need to do and what you have in place for your retirement years or in the event of your premature passing prior to retirement. This way, you know that all your preparation is safeguarded and your wishes will be fulfilled regardless of what your future holds.

It’s also wise to consider the sources of retirement income you might have. This could be Social Security, pensions or annuities, then determine how they integrate with your savings.

13. Consider a Side Hustle

Many people start a side hustle to make extra cash, explore new interests or test a business idea. But the money you make from something you’re passionate about can be an excellent way to add money to your savings or pay off debt. But how do you fit this extra work into your schedule without experiencing burnout?

A time management strategy is essential. You can start by assessing your weekly schedule and identifying time blocks to dedicate to your side hustle. This could mean early mornings before work or segmenting times during weekends. Prioritize tasks that match your energy levels during these times. For instance, creative tasks may best suit you for fresh morning hours, while administrative tasks could be for the evenings.

14. Regularly Check Into Your Financial Health

Keeping a regular tab on your financial health is as important as your annual physical checkup. It ensures you’re on track with your goals, helps you adjust to life changes and prevents unpleasant surprises. Regularly reviewing your finances can also give you deeper insight into your spending habits.

Start with a manageable schedule, like a monthly review of your budget and bank statements. This will give you time to assess whether you’re meeting your savings goals and if there are any upcoming expenses you need to prepare for.

It also helps to review your credit report and investment portfolio and make adjustments to ensure your money moves align with your life. Making financial check-ins a regular part of your routine helps you stay on top of everything, keeping your goals relevant and achievable.

Make Smart Money Decisions Now to Secure Your Future

Making smart money moves in your 20s is the best thing you can do for a successful retirement. Your future self will thank you for taking the steps to invest wisely and build up your savings. Create good spending habits now and keep debt down as low as possible. Each decision will create the life you desire in the long term.

Other Money Tips For Your 20s:

• How Understanding Your Enneagram Type Can Improve Your Finances
• 6 Tips to Make Ends Meet When Money is Tight
• 5 Money Mistakes I’ve Made In My 20s
• 3 Critical Money Lessons I Learned in My 20s
• 10 Money Red Flags To Avoid in Your 20s

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