Is It Even Worth Saving Money In Your 20’s?
Yes! For These Three Reasons
Fee-for-service financial planner and founder of PlanEasy.ca
There was a great personal finance question from a user on Reddit the other day that basically asked if it was even worth saving money in your 20s. The user asked “is it even worth saving money while you’re young?”
This is a GREAT question. The quick answer is YES!
Here’s a summary of their situation…
They are currently making a low income but expect it to increase dramatically in the near future. After graduation, they expect to potentially triple their income to $120,000 per year. The question is whether or not it’s even worth saving now with their low income when they could potentially save way more in the near future.
There were a few good responses from Reddit users that covered the three main reasons why saving now, even on a lower income, is still the right thing to do.
Let’s review the three reasons why saving while you’re young is so important…
Reason #1: Investment Experience
Most people learn the best when they’re doing something. That hands-on experience is the best way to learn. Investing is no different.
Investing when you’re young, when you don’t have a lot of money, is the perfect way to learn.
By investing when you’re young, you can determine which investment strategy works best for you. You can start to understand your tolerance for risk. You have more time to recover from any mistakes you make.
Investing also has a learning curve. Starting early puts you WAY ahead of your peers who may not start investing/saving until much later in life.
You have time to learn about diversification, risk vs return, asset allocation and asset location. These are mistakes that beginner investors often make. They put all their eggs in one basket. They don’t understand that there are different types of risk and return. Beginner investors hold too much of one type of asset, like going 100% stocks. Or they hold assets in accounts that aren’t the most tax efficient, like holding US stocks in a TFSA.
These are all things I can personally relate to. I started investing right after getting my first job out of university. I made a good income and a lot of it went into savings. Foolishly however, I invested a portion of my down payment too. When the financial crisis of 2008 hit, I quickly lost $16,000. I made multiple mistakes and they were costly. Had I started investing earlier, I may have not made these mistakes and could potentially be $16,000 richer today.
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Reason #2: Compound Returns
Another great reason to start saving early is due to compound returns. Over time compounding does the work for you. Your money starts to make more money all on its own. This only happens when you invest early.
Compounding is so powerful that someone who starts saving later will need to save way more just to catch up.
A person who saves $5,000 each year from age 20-26 will end up with $598,687 at age 65. This from just $35,000 in contributions.
Another person who saves $5,000 each year from age 25-35 will end up with $557,784 at age 65. They’ll end up with less money even though they made $50,000 in contributions.
The last person, who saves $5,000 each year from age 35-65 will end up with $505,365 at age 65. This is almost a full $100,000 LESS even tough they made $150,000 in contributions, $135,000 MORE in additional contributions vs the young saver.
Saving when you’re young, even if it’s a little bit, will let you benefit from the power of compounding.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein
Reason #3: Create A Saving Habit
Saving when you’re young creates a habit. This habit is, in my opinion, the most important reason to save when you’re young. It will create a foundational habit that will benefit you when you’re earning more.
If you spend 100% of your paycheck when you’re young, you won’t build the budgeting and saving skills you need when you’ll be earning more.
When you do begin to earn more money, it’s going to be easy to keep doing what you’ve always been doing, spend 100% of your paycheck.
When building a saving habit, you’re going to learn many things. You’re going to learn how to track your spending. You’re going to learn how to prioritize your spending. You’re going to learn how to budget your monthly income and expenses. You’re going to learn how to pay yourself first.
These are all skills you can learn at any point in your life but they’re much easier to ingrain early and when you’re making a smaller income.
Financial planner, personal finance geek and founder of PlanEasy.