Personal Finance

6 Easy Ways to Save Money in Your 20s

Saving money in your 20s can help you meet short- and long-term financial goals. Some financial experts suggest you save at least 20% of your monthly income, but the reality is many struggle to set this amount aside each month.

Although the COVID-19 pandemic has put a strain on many households' finances, Americans are saving more than ever. The U.S. personal saving rate, which is the amount of disposable income that remains after necessities are paid, spiked above 33% in April 2020, before falling back to 13.7% in December. This is a steep increase from December 2019 when the rate was 7.2%. To find a higher pre-pandemic savings rate, you'd have to go all the way back to 1975.

If you want to save more, you can start by following a budget, cutting costs and finding other sources of income. Paying off debt and making smart investments can also help you meet your savings goals.

Follow along as we dive deeper into these strategies.

Create a Budget and Stick to It

If you don't already follow a budget, now's a good time to make one. A realistic budget helps keep your spending in check by accounting for every dollar you earn and spend. You can also cut costs and use the money to meet savings goals, like building an emergency fund, saving for retirement or setting aside funds for a down payment on a new home.

It's easy to make a budget, and there are many strategies to choose from. Before you pick a budgeting plan, take note of the basics, including your monthly income, expenses and financial goals. Once your budget is set, make sure to track your spending to make sure you're sticking to it. If you find that you're overspending, consider living more frugally to get your expenses under control and put more toward savings. You might also have to adjust your budget if you find that your spending goals are unrealistic.

Save on Housing

Housing is often the largest monthly expense in a person's budget, but you can live well in your 20s without spending a fortune. Avoid a high-end apartment that stretches your budget so thin it keeps you from saving. Stick to the 30% rule, which suggests that you spend 30% or less of your gross monthly income on rent. So if you earn $4,000 per month, your rent payment should not exceed $1,200. Alternatively, the 50/30/20 rule would have you spend 50% of your budget on necessities, including rent, food and utilities.

If you're looking for an apartment or want to move to cut costs, don't settle for the cheapest option. Shop around to identify properties that meet your needs and budget. Ask about move-in specials and discounted rates if you sign an extended lease. You can also look for a new place to rent in the winter months when demand is slower to hopefully get a better deal. If having your own place is still too pricey, you might consider moving in with family (if possible) or getting a roommate to help boost your savings account.

Don't Overspend on Transportation

There's little justification to splurge on a luxury car purchase in your 20s, especially if it breaks the bank. Avoid the temptation to drive a pricey car if it simply serves as a status symbol and offers little in the way of practicality. Buying a reliable used car is typically the wiser financial move than buying brand-new, and you can even shop online if you need to buy a car soon.

Do you live in an area where you can get around using public transportation? You can avoid a car payment and expenses for fuel, insurance, vehicle registration, maintenance and repairs—costs that could easily amount to several thousand dollars per year.

Find an Extra Source of Income

Consider using your talents to freelance or offer tutoring services online. Another side hustle that's recently evolved is contact tracing—you can get hired as a contractor to help analyze how COVID-19 spreads in communities. Contact the health department in your state or county to learn more.

If you need to save money fast to meet a pressing financial goal, you can look for temporary gigs and odd jobs in your area. Ridesharing and delivery service jobs are a great place to start. Or you can check out TaskRabbit or Thumbtack to find odd jobs you can complete right now to make some quick cash. You can also sell items you no longer need online through Craigslist, eBay or Facebook Marketplace.

There's also passive income, which allows you to earn income without actively working. This means you can make money even while you sleep. Passive income can come from anywhere, including an investment account and the cash back rewards your credit card earns you while you shop. If you live in an area where there's demand, you can even rent out your parking space or your car. Other passive income streams, including affiliate marketing, rental properties and digital products, sometimes take time and skill to get up and running and require a more considerable investment.

Consider Retirement and Investing

Retirement may seem far off, but your 20s are a great time to start contributing to a retirement account. The earlier you start making contributions, the more time you'll give your money to grow, and the more you'll ultimately have in your account by the time you retire. In fact, due to the way retirement accounts grow, a few years' difference in when you start making contributions can ultimately add up to thousands or even tens of thousands of dollars difference in your earnings.

Try to contribute at least 10% to 15% of your pretax income to your retirement account. If your employer offers a 401(k) match, contribute at least the percentage they agree to match to avoid leaving free money on the table. Traditional and Roth IRAs are good alternatives if your employer doesn't offer a 401(k).

Once you're regularly setting aside money for retirement, there are several ways to invest your money in your 20s and get a headstart on building savings. Options include stocks, bonds, mutual funds, exchange-traded funds (ETFs) and real estate investment trusts (REITs).

The best option for you will depend on your financial situation, personal goals and risk tolerance. You can use a robo-advisor, which is an online automated investing service, to get started without spending a lot in fees.

If you're in debt but have disposable income each month, you don't necessarily have to put your saving and investing goals on the back-burner. Instead, you might split the funds between your savings accounts, investments and debts. If you have high-interest debts, however, it's typically worth it to prioritize paying them off, as the interest gained on your investments is unlikely to outpace the interest accrued on certain debts.

Pay Off Debt to Save Money on Interest

You can create a realistic plan to get out of debt and free up cash in your budget and save more. Otherwise, you may struggle to meet savings goals if you only pay the minimum on your debts each month.

To illustrate, assume you owe $3,000 on a credit card with an 18% interest rate and a minimum monthly payment of $75. If you paid only your minimum payment, it would take 222 months to pay the card off, and you would ultimately pay $3,923 in interest. Or, if you have a 10-year, $20,000 student loan with a fixed interest rate of 5%, your monthly payment will be $212.13. Only paying the minimum each month will cost you $5,456 in interest over the loan term.

You can pay off student loans faster by paying more than the minimum each month or consolidating or refinancing your loans to save on interest. Also, consider enrolling in automatic payments to avoid late fees. Some lenders also offer a small discount when you sign up.

If you have credit card debt, you may be able to use a debt consolidation loan or balance transfer credit card to save on interest. You can also find additional income sources and trim expenses and use the funds to pay down your balances faster.

Start Working Toward Your Savings Goals

Saving money in your 20s can be challenging, but these strategies can help you get started. If debt is holding you back, create a plan to start paying it off. You can also improve your credit score to qualify for debt consolidation loans and balance transfer cards that could save you a bundle on interest. Sign up for free credit monitoring from Experian to see where you stand and stay on top of your credit score.