It may feel challenging to build wealth in your 20s and 30s when you’re starting your first job and paying your first bills. But the decisions you make and the habits you form when you’re starting out can make a big difference in your financial future.
Even if you don’t have a lot of money to save, making smart financial decisions when you’re young can make it easier to reach your goals when you get older.
“When you’re in your 20s and 30s, time is on your side,” says Laura Cuber, certified financial planner and wealth advisor with Bartlett Wealth Management in Chicago.
“Because of the benefit of compounding returns, saving a little starting in your 20s and 30s is worth more than saving a lot starting in your 40s or 50s. This means even a small amount of money put into a retirement account early in your career can have a big impact when you are ready to retire,” she says.
Making the following financial moves in your 20s and 30s can help you build a solid foundation for financial security over your lifetime.
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How to Build Wealth in Your 20s
When you get your first full-time job — or even if you’re still a student and working part-time — you have an opportunity to start building tax-advantaged savings for the future.
You’ll also need to make some important financial decisions as your income grows. These are four things you can do to start building wealth:
1. Make the Most of Tax-Advantaged Savings
If your employer offers a 401(k) or other retirement plan, sign up right away — your contributions will be deducted automatically from your paychecks before you get used to having the extra money.
“People in their 20s and 30s just need to concentrate on putting away as much money as they can, because the surest way to get rich is regular, consistent savings over time,” says Pam Horack, certified financial planner with Pathfinder Planning in Lake Wiley, South Carolina, also known as “Your Financial Mom” because she specializes in helping young adults.
“Do it now, and you’ll never miss it,” she says.
You don’t have to start saving a lot, especially if you’re struggling to cover your regular expenses, but try to contribute at least enough to get the full employer match.
“This is free money,” says Rachael Burns, certified financial planner with True Worth Financial Planning in Folsom, California. “It’s essentially an immediate 100% return on your investment.”
If you can afford more, Horack recommends contributing at least 10% of your pay and increasing your contributions whenever you get a raise or bonus.
“According to our research findings, the excellent news is younger people recognize the importance of saving for retirement,” says Catherine Collinson, president and CEO of the nonprofit Transamerica Institute and Transamerica Center for Retirement Studies.
“Gen Z workers aged 18 and older and millennial workers have made a strong start on their savings,” she says. “An impressive two-thirds of Gen Z workers are saving for retirement and they started at age 19 (median). Almost 8 in 10 millennial workers are saving for retirement, and they started at age 25 (median).”
Most people starting out can qualify for the retirement savers’ tax credit, which can give you an extra benefit for saving, Collinson says. The savers’ credit can reduce your tax liability by up to $1,000, based on your income and the amount you save in a 401(k), IRA or other retirement plan. For more information, visit the IRS Saver’s Credit page.
Even if you don’t have a job with a 401(k), you may be able to start saving in a Roth IRA when you have earned income, even if it’s just from a summer job or part-time work at college.
You can contribute up to the amount you earned by working for the year, with a maximum of $6,500 in 2023, and you can withdraw the earnings tax-free after age 59 ½. You can withdraw the contributions at any time without taxes or penalties.
2. Build an Emergency Fund
As you start to support yourself, it may be difficult to cover your regular bills. But you need to be prepared for unexpected expenses, too.
“An emergency fund is critical,” Horack says. “By putting money into that on a regular, consistent basis, it builds a habit and discipline while it’s building up your money.”
Having the extra money available helps you avoid landing in expensive debt or raiding your retirement accounts if you lose your job or you have to pay for car or home repairs, medical expenses or other extra costs.
“Our research finds that many workers do not yet have adequate emergency savings,” Collinson says. “As a result, they are dipping into their retirement accounts by taking hardship withdrawals and early withdrawals to cover unexpected setbacks, which can be counterproductive to their long-term goals.”
[READ: How Much Should You Save In an Emergency Fund?]
Even if you can’t afford to save a lot, starting with a small amount can help.
“Build at least one month’s worth of living expenses in emergency reserves,” says Tim Maurer, chief advisory officer for SignatureFD. “Everybody talks about three to six months, and that’s great, but it’s hard for most people to get there in early adulthood, so start with one month, so you’re not living paycheck to paycheck.”
Keep the money separate from your regular checking account, so you aren’t tempted to spend it on everyday expenses. Burns recommends opening a high-yield savings account, which can earn some extra interest but from which you can still withdraw without penalty.
3. Make a Basic Budget to Manage Your Cash Flow
People often think of a budget as something constrictive that makes you cut back your spending on everything that is fun. But a budget can really help you manage your cash flow so you can focus on your financial goals over the short and long term — whether it’s saving for retirement, a car, a house down payment or a vacation.
“Put together a budget so you are putting your goals first,” Horack says.
“You’re saving for those things, even if it’s $5 per month for your goal. It will take a while to save up for those savings funds, but if you don’t start saving now, you’ll never get there. Start with your budget, figure out your fixed expenses and your other spending, and work toward managing that in a responsible way,” he says.
“One of the biggest struggles for people just entering the professional world is cash flow,” Cuber says. “Starting salaries are often fairly low, but between rent, student loans and savings needs, recent grads usually have pretty significant expenses. To help keep your cash flow in check, track your spending and develop a budget.”
4. Manage Your Debt and Credit
Start building your credit record, so you can qualify for a better rate when you eventually take out a car loan or mortgage.
“People in their 20s and 30s should make sure their credit is in good shape,” Cuber says. “When you’re just starting out, you have no credit history to speak of and should build it by opening a low-limit credit card that you can afford to pay off each month. By making regular payments, you will build a strong credit history to rely on when you need to finance a car or a home.”
It’s also a good time to make up for past mistakes before you apply for a loan.
“If your credit score has taken a hit from decisions you made when you were younger, you should work on improving your credit score,” says Cuber. “Most banks offer credit score monitoring and analysis and free websites like Credit Karma can give you a full picture of your credit history and help you decide what you need to do to improve your score.”
Be careful as you start to have access to credit or you could land in expensive debt that could impact your finances for years. “Pay off high-interest consumer debt,” Maurer says.
How to Build Wealth in Your 30s
As your salary increases and you have more financial responsibilities — you may be married and have a family — it can become even more difficult to manage your cash flow. The following steps can help you continue to build wealth as your expenses increase through time.
1. Reassess Your Budget With Major Life Changes
“People in their 20s and 30s go through a lot of life changes — getting married, buying a house, having kids,” Cuber says.
“Having a handle on your expenses and reevaluating your budget before you reach those milestones can be a big help. For example, if you are expecting a baby, you can save additional funds to cover an unpaid maternity leave or all the new baby gear you need to purchase, and you can determine what changes will need to be made to cover ongoing child care expenses,” she says.
You can also start saving some money for the child’s college in a tax-advantaged 529 account.
Even though your salary may get larger as you get older, you’ll have even more financial priorities to juggle. You’ll also need to adjust your emergency fund as your responsibilities grow, especially after you buy a house or have a family depending on your income.
[READ: What Is ‘Lifestyle Creep’ and Should You Try to Avoid It?]
If you have a high-deductible health insurance policy, you can do double duty by saving in a health savings account, which gives you a triple tax break. Your contributions are tax-deductible (or pretax if through your employer), the money grows tax-deferred, and you can withdraw it tax-free for eligible medical expenses at any age.
Unlike a flexible spending account, there are no “use-it-or-lose-it rules” — you can use it to cover medical expenses now or keep the money growing for the future.
2. Continue Saving for the Future
When you have a family, it may seem difficult to have enough money to cover your regular expenses. But don’t stop saving for the future.
Continue contributing to your 401(k) or other retirement plan at work, and increase your contributions when you can. “Use raises to build your savings,” Cuber says.
“Even if you can’t save much initially, every time you get a raise, use a portion of it to increase your retirement savings and the rest to increase your standard of living. This helps you increase the amount you are saving without feeling a strain on your take-home pay,” she says.
Many employers offer retirement savings calculators to help you assess where you stand. “Your situation will evolve over time, so make a point to periodically revisit your estimates,” Collinson says.
Take advantage of the opportunity to save in a Roth 401(k) or a Roth IRA. Your contributions are not tax-deductible now, but the money grows tax-free for retirement — unlike traditional 401(k) and IRA contributions, which grow tax-deferred but are taxable when you withdraw them.
“Younger workers tend to be in lower income brackets than older workers, so your 20s and 30s can be a great time to take advantage of Roth IRAs or 401(k)s,” Cuber says.
“Because the money you put into a Roth is post-tax dollars, you are paying tax on it the year you receive it. Once it is in the Roth, it will grow tax-free and eventually be distributed tax-free. Taking advantage of the lower-earning years at the start of your career to make Roth contributions can help you build a tax-free nest egg even if you switch to make pretax contributions when your earnings are higher later in your career,” she says.
Match your investments with your time frame. Since retirement may be more than 30 years away, you can invest in stock funds that have more short-term volatility but the potential for larger long-term growth.
Many 401(k) funds start out with more money invested in stock funds when you have decades before retirement and automatically shift the money to more conservative bond funds and cash as your retirement date gets closer.
Protect Your Wealth
As your income rises and your start to build your savings and accumulate assets, it’s also important to protect your wealth for your family.
“If someone is reliant on your financial contribution, consider getting a term life insurance policy to replace what would be lost,” Maurer says.
You can buy a term life insurance policy that locks in rates for 20 or 30 years, which could provide coverage until your kids are grown or your house is paid off.
“Particularly if you have a family, you should make sure you have enough to cover your lost wages, child care and education,” Cuber says.
It’s also important to have basic estate planning documents to make sure your assets pass to the people you want.
“Create estate planning documents — a will, durable power of attorney and advance directives,” Maurer says. “It’s highly unlikely that you’ll die or become disabled early in life, but in the case that you do, these three documents will help ensure you — or your heirs — avoid a disaster.
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How to Build Wealth in Your 20s and 30s originally appeared on usnews.com
Update 07/18/23: This story was published at an earlier date and has been updated with new information.
