saving in twenties

This article is a guest post from Jessica Wagner, a freelance writer.

If you’re like me, you probably don’t have a lot of money left over at the end of the month. If you’ve just started a new career, you’re probably not bringing home a lot of cash; if you’ve decided to go back to grad school or explore other options, you may not be earning very much money at all.

For a lot of people in their 20s, simply having enough money to pay the bills is a significant achievement. However, there’s also no better time to invest. As difficult as it may seem to set aside money for investments when you’re living in a tiny apartment with roommates and trying to balance all of your other financial obligations, even investing a little bit of money every year has enormous long-term effects for your future.

Types of Investments

The most common investments available to 20-somethings are the 401(k) plans set up by your employers or the Roth IRAs you can set up through your bank. These investments are intended as retirement accounts — once your money goes in, it can’t come out until you retire, unless you want to pay taxes and penalties — but if you start investing now, your tiny investment will eventually earn hundreds of thousands of dollars more than a person who waits until her 30s to start saving for retirement.

There are other options if you don’t want to put everything into a retirement account. One of them is, of course, the stock market. I’m going to recommend against going the stock route, because unless you are lucky enough to have large amounts of disposable cash, you can’t risk the gamble. Right now you need to be thinking about how to make your available dollars go as far as possible.

One of the best types of investments for a young 20-something is a CD, or “certificate of deposit.” When you buy a CD, you loan your money to a bank in exchange for a predetermined interest rate. Unlike other types of investments, CDs aren’t variable; that is, they don’t go up and down like stocks or mutual funds. You can track exactly how much money you earn with a CD, down to the penny.

Why are CDs so great for young people? Well, you’re probably going to have a few major expenses coming up in the next 10 to 15 years, such as a wedding, a home down payment, or that round-the-world trip you’ve always dreamed of. Unlike other investments, such as Roth IRAs, a CD does not force you to put your money away until you’re 65. Instead, you can put it away for a few years, and then get it back, with interest attached.

Learn about CD growth and safety, and then start searching for the best CD rates. When you see exactly how fast your money can grow, you’ll be glad you made the investment.

Investing vs. Student Loan Payments

One of the most common questions I get from other young 20-somethings is “Shouldn’t I spend all of my money on paying down my student loans?” Yes, I’ve got student loans too, and my student loan balance is significantly higher than the national average of $24,301. But that isn’t stopping me from saving for my future.

For most of us in this generation, student loans will be just another monthly payment, like a car payment or an electric bill. It’s part of the cost of being an adult. Yes, you can throw every extra penny you have at your student loans and get them fully paid off by the time you’re 40, but that means you start at age 40 with nothing saved for retirement. It may mean you put off home buying or starting a family. Even though it seems like the responsible thing to pay down your student loans as fast as you can, it’s actually going to prevent you from maximizing your financial potential.

Instead, think holistically. Every month, you’re going to pay your rent, and you’re going to pay your bills. You’re going to pay down a little bit of your student loans. And, most importantly, you’re going to save for your future. You’re going to invest in that CD so you have money for your upcoming expenses. You’re going to maximize your 401(k) to get that employer match. You’re going to live life like you’re planning for the whole thing, not simply paying off something that happened when you were in college.

Now it’s your turn. Are you taking advantage of the benefits that come from saving in your 20s? How are you making it work with your budget? Do you find it difficult to decide between investing in your future and paying off your student loans? Do you have questions about CDs or other investments?

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Mike, aka The Dividend Guy, authors The Dividend Guy Blog since 2010 and manages portfolios at Dividend Stocks Rock. He is a passionate investor.