Keeping Up With The Bulls

A personal finance blog focused on making more money, saving money and smart spending.

How to Save Money in Your 20s

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Saving money in your 20s will help you achieve financial stability. A lot of people in their 20s are dealing with student loan debt and aspiration for days of having a strong financial cushion and achieving their dream lifestyle. While it’s easy to think that financial planning may be pointless at this stage, the baby steps taken now will create a financial foundation. Increasing your income is most important, but spending less than you make is a close second. Increase your income, be smart with your spending, save money and invest are the recipe for success. Here are tips on how to save money in your 20s to set the stage for a strong financial future.

Increase Your Income

It’s not about what you make, it’s about what you spend is true. However, it’s a lot easier to save money when you make more money. Your lifetime earnings are decided in the first decade of your career. As a result, increasing your income in your 20s is especially important.

There are several ways to increase your income. First, hustle at your job and create a plan to double or triple your salary. This plan may include strategic networking to get promoted or switch industries, identifying what you need to do advance your career, get another degree and / or expand your skill set. Second, build additional streams of income. In order to begin generating passive income, you need to have money first. To build wealth quicker, start a side hustle in addition to your day job. As your income increases, keep your spending flat. This will allow you to save even more money in your 20s.

See Also: 10 Pieces of Career Advice for Young Professionals

Save Money In Your 20s by Being Frugal

Now that you’ve focused on making more money, how do you avoid spending your entire paycheck? Control your expenses. Do you make more money than your friends? Doesn’t matter, spend as if you make less. Consistent saving and investing, especially in your 20s, can be an effective way to accumulate wealth. The more you save in your 20s, the less you have to save later in life due to compounding. See how even small savings amounts can add up over time with this compounding interest calculator.

In your 20s, this means being frugal for a few years. You don’t have to be frugal forever. The longer you’re able to live frugally like you lived in college the easier your finances will be. Being frugal also doesn’t mean never having fun. You don’t have to cut back in all areas either, the single most important expense is housing.

Save Money On Housing And Live with Roommates

Some of the best ways to save money in your 20s include being smart with housing. Housing is likely the largest expense in your 20s. Once you sign a lease, you’re stuck with that expense until your lease ends. Don’t become “house poor.” Experts say housing should be no more than 30% of your gross income and that includes all housing expenses. However, this doesn’t mean you should spend 30% of your gross income. The less you spend on housing the more money you’ll have available to save, pay down debt and spend on other things you enjoy. Want to live in a certain location? You may have to settle on the amenities and living with roommates.

The most sure way to save money on housing is to live with roommates. Not only are you able to spend less per month on rent, you’re also able to split utility bills, and split buying the furniture. It’s expensive to furnish your first place. Splitting these costs will save you a ton of money the first few years and enable you to start building a savings cushion. Bringing your own lunch can save $7 / day or $140 / month. Being smart with your housing can save you hundreds a month and thousands a year.

Buy A Used Car or Skip The Car Altogether

The next biggest cost you’ll likely have is transportation. Sometimes, a car is unavoidable. You need it to get to your job and back. But, with remote working increasing, public transportation and rideshares becoming more available can you skip the car for a year or two for a little inconvenience?

Before you buy a car, do the math. Can you use public transportation, bikes and ride shares? How much will this cost you per month? Then, compare this to how much it’ll cost you to own a car. Don’t forget, the money you spend on a car could have been invested and earning you more money or paying down debt. Car expenses also include maintenance, gas, parking, insurance and depreciation. If you can, skip the car. If not, spend as little as you can on a car in your 20s. You can always get a nicer car when you have more money.

Save Money on Food and Drinks

There are ways save money on food and drink and still have fun. You can still go to restaurants and bars and save money in your 20s. Take advantage of happy hour specials. Go over a friends house and have a drink before heading to the bar. When you get to the bar, limit yourself to one drink. Invite people over to watch sports instead of going to a bar. Take advantage when there is free food at events. Bring your lunch. Set a monthly budget for eating out and going to bars. There are plenty of ways to continue to enjoy eating out and also save money.

Eat at home for all other meals and bring your lunch. Planning your meals and using coupons on groceries will save money. Don’t order takeout and instead save your eating out money for when you go out with friends.

Limiting spending on food and drinks is a great money move in your 20s because it starts developing discipline around spending money. It’s hard to say no to always going out with friends and spending money on food and drink but it adds up. But, this is small amounts of money compared to later on. If you can’t say no to going out to save money, how are you going to do when you’re invited on $1,000+ vacations? Practice saving money here and the discipline will spill over to other areas.

Be Frugal With Your Vacation Spending

The best time to travel is in your 20s when you have less responsibilities and more time. This is also when you have the least amount of money so how do you best balance this? Save money in your 20s by taking road trips. Rent a house with friends to reduce spending on lodging. Split a hotel room with 3 other friends to reduce costs even more. There are also plenty of ways to save money on travel, you don’t have to give up travel entirely.

Another option? Work for a global company and take advantage of traveling for your job. It’s much cheaper to spend 2 extra nights in Europe when you’re flying there for work than paying for an entire Europe trip. At minimum, sign up for every single travel loyalty program. This way, you can accumulate points to use for free nights, free airfare and free car rental days. You can also get a good rewards credit card and redeem for free travel.

Limit Spending on Clothing

When you first graduate college you will need to spend some money on clothing. Your college wardrobe won’t suffice for a professional wardrobe, attending weddings, etc. Spending money on clothes in unavoidable. You can continue wearing free t-shirts for a while at home, at the gym and on weekends but at some point you will want to upgrade there too. When you do spend money on clothing, take advantage of sales. Also take advantage of shopping second hand like on Poshmark and even sharing clothes with your roommates if you can. To start to build a wardrobe, buy 1-2 nice things a year like a good pair of black heels and a nice leather black tote.

Take Advantage of Company Benefits

Salary is important, but don’t forget about job benefits. Job benefits include vacation time, health insurance and 401(k) match benefits but did you know there may be more benefits to help you save money? In college you were able to get discounts with your college ID. Post college, look for ways to use your company ID to save money. Some health insurance plans offer money towards a gym membership every year. Depending on the industry and area, companies may offer free or discounted food, free gyms on-site, discounts on auto insurance, discounts on personal travel and more. Look at your internal company site to learn more about perks offered by your company.

Track, Manage and Reduce Your Spending

Now that you have those saving money tips, know how you are spending your money today. Can you use any of the tips above to save money? You must spend less than you make in order to save money in your 20s. To do this, you need to understand where you’re spending your money. When you just graduate, you’re adding a lot of new expenses. For the first few months, track every expense and see where you’re spending your money. Don’t change any behaviors, only add tracking what you spend and follow how you normally spend your money. At the end of the month look back at what you spent your money on. Do the same for the following month. Are you spending more or less money than you are making? Were all those purchases necessary? How did your spending change month to month?

Create a Budget

Saving money in your 20s starts with having a budget. Create a budget that works for you and isn’t too restrictive, otherwise you’re less likely to follow it. There are plenty of apps like Mint which make this process much easier. First, input your regular bills like rent, electricity, internet, etc. These are all of the bills you must pay. There may be ways to decrease these bills later, but for now put what you pay today. Set aside money for the things that bring you happiness and finally add in everything else. Be realistic too – you’ll need clothes and you’ll be invited to a lot of weddings in your 20s.

It’s ok if your budget is imbalanced when you first add everything together. Budgets take multiple iterations to get right. Keep shifting around numbers until you’re able to balance your budget. If you find that no matter how much shifting you can’t find ways to save money with your current income though then you need to start looking at ways to make more money.

Set a Savings Goal and a Retirement Savings Goal

You want to save money in your 20s, but how much? Give yourself a goal for how much you money you want to save per month. It doesn’t have to be a high number – you can start with even $5 a paycheck and increase it. Use this money to start building your emergency fund, so if any emergencies arise you have cash to cover it. You can find a calculator here to help identify how big your emergency fund should be. And, don’t forget to save enough money for retirement to get your employer match if they offer it at minimum. This graph from Business Insider shows the difference of saving $100 / month for retirement starting at 25 verse 35. The person who started at 25 ends up saving $73,000 more by age 65 solely by starting 10 years earlier. Only $12,000 of that difference is additional contributions, $61,000 is from compounding interest.

One trick to avoid cutting spending is to move more of your saving towards your 401(k) contributions. 401(k) contributions are pre-tax, so you’ll reduce the amount of taxes you owe in your budget. Once you’ve identified how much money you want to save, or can save, automate it! One of my favorite money saving hacks is to automate your savings. Take these steps to automate your savings and watch your savings grow.

Where Do You Put the Money You’ve Saved?

Where should you put the money you’ve saved? Money saved in your 20s should first be held in a high yield savings account as part of an emergency fund. Unfortunately, there have been interest rate cuts across the board including high yield savings accounts, so you won’t make much money here. But, it is better than nothing. Nerd Wallet shares here the top 10 best high yield savings accounts. You can also look for banks offering sign up bonuses.

How to Save Money in Your 20s Summary

How to save money in your 20s can be summed up in a few simple steps. Increase your income and keep your spending flat, saving the difference. Be frugal for a few years. This includes living with roommates and spending as little as possible on transportation. For all other expenses prioritize what brings you happiness and cut back spending in other areas. Set a savings goal and stick to it. Yes, saving money in your 20s is harder than saving money in your 30s. Your salary is lower and you don’t own much yet, increasing your initial expenses. But, your lifestyle expectations are also the lowest. The more you can save when you’re young the easier it is as that savings will continue to generate passive income for you. Set yourself up for success by saving money in your 20s.

Here are more smart money moves to make in your 20s.

10 Passive Income Ideas in 2021

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The pandemic has changed many of our income plans. While some people are able to work from home they may have reduced pay or uncertainty about their pay / hours. Others find themselves laid off or furloughed. With all this uncertainty, it’s important to have several income streams. This helps reduce the risk of no income should you get laid off or furloughed from your day job. Even though there is uncertainty of when businesses can return to normal there are plenty of ways to earn more money from the comfort of your home. Learn how to generate passive income and then get started with these passive income ideas below. These passive income ideas range from very easy – all you need to do is swipe the right credit card – to passive income investing – such as dividend stocks – which should be researched before the investment is purchased.

Use A Cash Back or Rewards Credit Card

One very easy way to start a passive income stream is to get a cash back or rewards credit card. This doesn’t mean spending additional money. What it does mean is to generate dollars, or rewards points, from the money you are spending anyways. This approach won’t put actual cash in your pocket. Instead, it’ll either help reduce your spending because you can now use points to buy things or it’ll help reduce your credit card bill with cash back. Instead of spending more money, save the money you would have spent.

Put Your Emergency Fund and Savings In A High Yield Savings Account

Every dollar you save, whether for investing or for an emergency fund, should be generating additional income for you. Any money you have saved for an emergency fund or for investing later should be held in a high yield savings account. Most of the online only banks tend to have higher interest rates (such as Marcus by Goldman Sachs and Ally Bank). Right now the highest interest rates are around 0.6% APY (annual percent yield). Unfortunately these rates decreased significantly over 2020 and aren’t as appealing as they used to be. Not sure where to put your money? Nerd Wallet shares the top 10 best high yield savings accounts.

Rates are falling with the Fed lowering rates. But, you’ll always need an emergency fund at minimum so you might as well get something.

Open Up A New Bank Account And Get A Signup Bonus

Sometimes banks run promotions where you can make $100 by signing up for a checking account or savings account! Usually there are conditions like a minimum deposit amount, setting up direct deposit or holding the money in the account for a set amount of time. Money Crasher’s has a list of 31 bonuses banks are running now, with bonuses up to $300!

Open Up A Certificate of Deposit

A CD (certificate of deposit) locks up your money for a set period of time but guarantees a return. If you’re just starting out and have fully funded your emergency fund a 12 or 18 month CD is a good place to start (assuming the rates are higher than a high yield savings account). It’s good investment to start with as you get to learn about illiquid investments but you know when you’ll be able to take the money out and it won’t be held for long. Don’t have a preferred bank? Here are the best rates for CDs right now.

Invest in the Stock Market

Stocks are a way to build wealth passively. Stocks are a type of investment that represents ownership in a company. Investors buy stocks that they think will go up in value over time. Investors don’t make (or lose) money until they sell the stocks they buy. There is no guarantee that the stocks investors buy will go up in value. This is true in any market, although it is more often talked about when there is a lot of market volatility. Don’t worry if you only have a little amount of money to invest. You can open up a trading account on Robinhood with $0 and can buy fractional shares of a company. Starting June 9th you can buy fractional shares of top companies on Charles Schwab with as little as $5. If you’ve never invested in the stock market before learn how to start investing.

Invest in Dividend Stocks

Dividend stocks are stocks that offer a discretionary distribution of profits. When researching stocks you’ll know if a stock is a dividend stock if you see a yield greater than 0. Dividends are paid out on a monthly, quarterly or yearly basis. Investors need to own the stock on the ex-dividend date in order to receive the dividend payment. Stocks that pay dividends typically provide stability to a stock portfolio but do not outperform high quality growth stocks according to Investopedia.

Invest in Real Estate Investment Trusts (REITS)

Think of a REIT like a mutual fund for real estate. REITs is a type of company that allows investors to pool their money to invest in real estate. In order to be considered a REIT, the company is required to pay out at least 90% of their taxable income back to their investors. That is what usually makes REITs a great investment to generate passive income. It’s important to be aware that in these tough times tenants may not be able to pay rent so before you invest in a REIT know who their top tenants are and what risks they may have in their portfolio. Already several retailers have announced bankruptcies such as J.Crew and Neiman Marcus. Investors should understand if the REIT they are investing in has exposure to these businesses or other retailers that may be at the brink of bankruptcy. Learn more about investing in REITs here.

Participate In An Employee Stock Purchase Plan (ESPP)

ESPP is a benefit offered by some publicly traded companies to their employees. ESPP is the ability to purchase company stock through payroll deductions at a discounted rate.

The effort required is minimal and requires enrolling in ESPP and selling the shares to realize gains (or losses). You have a guaranteed return if you sell the day you receive the shares. If you decide to hold the shares for longer, and the shares increase in value, it will help you accumulate wealth. Companies can offer a maximum discount of 15% on company shares. With current savings accounts interest rates at best at 1.3% APY, and average stock returns at 5-7% a year, but not guaranteed, this is a great deal.

See Also: Why You Should Participate In Your Employee Stock Purchase Plan

Participate In A 401(k) Company Match

A 401(k) company match isn’t money you’ll be able to touch until you retire, but it’s another way to generate income without extra effort. 401(k) plans are retirement savings plans sponsored by employers that allows employees to contribute to their retirement savings pre-tax. Many employers also offer to match or partially match employee contributions. Learn more about 401(k) plans including tax benefits, employee company match and accelerating funding your retirement.

Invest in Startups

According to Fortune, while the number of U.S companies continues to grow, the number of U.S. companies that are traded on stock exchanges has plunged 45% since peaking 20 years ago. Additionally, new companies have been completely disrupting traditional business models but many of these companies aren’t yet public. If you only invest in public companies, you are limiting your investment options more so than previous generations.

See Also: How to Start Investing in Startups

Additional Ways to Increase Your Income

Often you’ll see blogging, investing in real estate and flipping items on eBay referred to passive income streams. Yes, these are all ways to make more money. However, all of these options require a lot more time and effort to see the payoff. Becoming a landlord isn’t just buying the real estate, getting a tenant and collecting a check. A passive income stream is truly a set it and forget it. If you’re willing to put in more effort, learn about how to make money fast with a side hustle.

What are ways you’ve found to generate passive income streams?

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Why You Need An Emergency Fund

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Emergencies aren’t a matter of if, but when. When you’re faced with an emergency, having an emergency fund to cover unexpected medical, car, house or other expenses will help minimize the stress during these times. Having an emergency fund with 3-6 months worth of expenses will help you prepare for when an unexpected expense comes up. Learn why you need an emergency fund, how much you should have in your emergency fund and where to keep your emergency fund.

What Is An Emergency Fund

An emergency fund is an amount of money set aside to cover emergencies if they arise. When you first start saving money, the first thing you should fund is your emergency fund. An emergency fund is money that is easily accessible and liquid (such as money held in a checking account or savings account) that you have for when things go wrong. This includes an unexpected health bill, unexpected car repair, if you lose your job and so forth. The golden rule is 3-6 months of expenses but it really depends on your situation. You can find a calculator here to help identify how big your emergency fund should be.

Once you’ve built up an emergency fund you can also use this money to improve your life. For example, moving is expensive. If you aren’t living in the location you want to end up in start building up an emergency fund to pay for the move and the first few months of living expenses.

Why You Need An Emergency Fund

An emergency fund is supposed to be for unexpected expenses, but are all expenses really unexpected? To reduce unplanned expenses, do a bit more analysis and see how you can plan for expenses that aren’t frequent.

Even if you plan for “unexpected” expenses do you still need an emergency fund? The answer is yes. Say you think you’ll have $1,200 in household repairs needed this year. From a yearly budget perspective that averages out to $100 / month? But, what if that expense hits in January? It’s in your budget, but if you were only relying on your paycheck you wouldn’t have the full amount of cash you need until the end of the year. An emergency fund will give you the cash you need in the short term.

Health Emergencies

An estimated 530,000 American families turn to bankruptcy each year because of medical issues and bills every year. Your health insurance may not cover as much as you think. While health emergencies are truly an unexpected expense, having an emergency fund will help you focus on your health instead of worrying about money during this time.

Car Emergencies

If you have a car you know you’ll need to perform regular maintenance. This includes oil changes and emissions tests plus other fees like city stickers and insurance. As a car ages, you should assume you’ll need to replace car parts. For example, car tires should be replaced every 6 years or more frequently if you drive often. Estimate when you’ll need to spend more money maintaining your car so you have fewer unexpected big bills.

Of course, no matter how much you plan there may be an accident. For the unexpected having cash in your emergency fund to cover a deductible will help.

House Emergencies

If you’re a homeowner you should estimate 1-3% of the purchase price of your home every year for home repairs. Plan for this in your budget and if you don’t end up using it set it aside for the next year. There won’t always be a major home repair but you want to be prepared when it does happen. Roofs will need to be replaced every 20-30 years depending on the material. Furnaces should last 15+ years. Homes usually need to be painted externally every 5-10 years.

Knowing when these were last replaced in your home will better prepare for these expenses.

Job Emergencies

You never know if you’ll be laid off, or injured where you can’t work anymore. Perhaps your job has become detrimental to your health or you’re feeling burnt out and need some time off. An emergency fund provides some cushion in case your job doesn’t go as planned.

How Much Money Should You Have In Your Emergency Fund?

There isn’t a one number fits all for how much you should have in your emergency fund. The golden rule for emergency funds has been 3-6 months of living expenses. That way if you get laid off you have money in cash to fall back on. If your money is all in investments you’d have to sell investments to cover your daily expenses.

Use the emergency fund calculator by Money Under 30 to determine what the right number is for your emergency fund.

Another way to look at how much you need in your emergency fund is to determine how much money do you need to feel secure? If you lose your job tomorrow or have an emergency repair such as needing a new furnace or a major car repair what amount of money would make you feel secure?

What If You Don’t Have Enough Money to Fund an Emergency Fund?

The toughest time will be when you get started. If you’re starting in debt funding an emergency fund is even more daunting. Your first thought should be how you make more money. Can you start a side hustle? Make more money at your job? Secondly, look for ways to cut your spending so that you don’t accumulate more debt and put that money toward your emergency fund.

There are always unexpected expenses that arise. If you don’t have money to fund an emergency fund that doesn’t make you immune to an emergency occurring. While you’re paying down debt, you should also contribute to your emergency fund so you don’t have to take on more debt when an emergency inevitably arises. That way, you can avoid having to take out credit card debt at 18% interest when an emergency arises.

See Also: How to Save For An Emergency Fund

Where To Keep Your Emergency Fund

The best place to put your emergency fund is somewhere where you can easily access the funds but not too accessible where you’ll spend it on something else. It’s best to have a separate account so you don’t accidentally spend it. It needs to be liquid because you need it in case of an emergency. A great place to store your funds is a high yield savings account. A high yield savings account is a great place for your emergency fund because there are usually limits as to how often you can withdraw money from a savings account and your emergency fund will at least generate some money. Nerd Wallet shares here the top 10 best high yield savings accounts.