Being in one’s mid-twenties might provide challenges in terms of managing one’s finances. You are likely in the early stages of adulthood, maybe without the responsibilities of owning a home or caring for a family. However, it is important to note that your thirties are approaching, and it is possible that you may have accumulated college loans or credit card debt that will need repayment.
Considering the present economic conditions, rampant inflation, and exorbitant living expenses, particularly in major cities such as New York and Los Angeles, along with the persistent climate problem, it is unsurprising that several individuals in their mid-twenties are pondering the ideal amount of savings they should have amassed by the age of 25. Is it necessary for me to enhance my preparedness for the future?
If you are one of such individuals, be certain that you are currently making progress in the correct direction. It demonstrates that you are attentive and prepared to effectively handle your financial matters. In order to assist you, we have consulted finance professionals to determine the optimal savings target for an individual at the age of 25, as well as providing further financial advice.
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What is the recommended amount of money to have saved by the age of 25?
There are two solutions to the topic of how much one should have saved by the age of 25: the optimal amount and the practical amount. Given the unique circumstances of each individual, the financial specialists we contacted carefully considered several elements, including income and expenditures.
An optimal savings amount for a 25-year-old would be $20,000.
According to Bill Ryze, a licensed Chartered Financial Consultant (ChFC) and board adviser at Fiona, it is ideal for your savings to amount to $20,000 by the time you reach the age of 25. The median income for individuals aged 25 to 30 in the United States is $20,540.
Ryze suggests that young individuals in the U.S. should aim to save at least 15% of the average yearly wage earned by workers in their early 20s. The typical annual pay for individuals in this age bracket is around $38,500. Ryze states. By saving 15% to 20% of your salary, you will make significant progress towards reaching this amount by the age of 25.
The practical solution is to have enough savings to cover six months of living expenses.
The extent to which you may save money is contingent upon many circumstances, including your work status, earnings, and cost of living. It follows logically that if you have a higher income, you have the ability to accumulate larger savings. For instance, a young adult who lives with their parents incurs lower expenses for rent and utilities in comparison to their peers of the same age who live independently.
What is the correct response? Strive to accumulate a financial reserve equivalent to three to six months’ worth of living costs. Having a good financial cushion might help to cover unexpected costs or give support in the event of job loss. “It is also a fundamental basis that can aid in the management of more substantial financial objectives in the future,” said Darian Shimy, the founder and CEO of FutureFund, a fundraising firm.
What is the recommended amount for a 25-year-old to have in their 401k?
In essence, a 401k is a retirement plan that is sponsored by your company and offers tax advantages. Usually, individuals have the autonomy to choose the amount of money they want to contribute to their 401k retirement plan, and the employer may provide a matching contribution, contingent upon their specific policy.
Due to the variability of individuals’ circumstances and work perks, there is no universally applicable contribution amount. Shimy emphasizes the need of initiating contributions promptly. It is recommended to begin making contributions to a 401K by the time you are 25 years old, particularly if your company provides a matching contribution.
To achieve a certain goal, allocate 10% to 15% of your yearly earnings into your retirement fund. “It is commonly advised to save enough money to receive the full match, as it is essentially a form of free money,” he states. Setting a goal to save around 10% to 15% of your yearly earnings, including any contributions from your company, is a strong objective that establishes a foundation for your long-term financial well-being.
Which should be prioritized: debt repayment, loan repayment, or saving?
It is not unusual for individuals in their mid-twenties to own educational loans and credit card obligations. In addition to living expenditures, these bills may have a negative impact on an individual’s disposable income and savings goals. In order to achieve your desired level of savings by the age of 25, it is advisable to address one issue at a time, beginning with the credit cards.
Ryze advises prioritizing the repayment of high-interest loans. High-interest credit card balances, with an annual percentage rate (APR) of 18% or above, have the potential to significantly deplete your financial resources. I suggest prioritizing the repayment of the debts since the interest expenses above the possible gains from investments.
Next, prioritize building up your emergency fund. Establishing an emergency fund is of utmost importance. According to him, it is advisable to have an emergency fund equivalent to at least three months’ worth of your net income.
After establishing your emergency fund, it is now necessary to address your student debts. It is advisable to establish a separate savings account to avoid the temptation of using that money for other objectives. “To safeguard yourself from unforeseen financial problems, it is imperative not to entirely disregard your savings, even while prioritizing debt reduction,” advises Shimy.
Here are five strategies to effectively save money throughout your twenties
From coming-of-age movies, we have gleaned that adulting is a challenging task, particularly if one does not possess inherited wealth or privileged connections. If you have worries about your financial future and objectives for saving, here are some suggestions to assist you in increasing your savings:
1. Establish your financial objectives
Occasionally, individuals have difficulties in saving money due to a lack of clarity on their savings goals. Establishing a deliberate purpose may serve as a catalyst to inspire you to save for the future and make more informed investing decisions aligned with your objectives.
“Ryze suggests giving priority to objectives such as accumulating funds for a down payment, establishing an emergency fund, and ensuring a comfortable retirement.” Develop your investment strategy based on your specific requirements, anticipated gains, and desired investment duration.
2. Allocate your expenditures within a predetermined budget.
Effective budgeting is crucial in managing personal money. It is vital to possess a comprehensive comprehension of your earnings, monthly expenditures, and patterns of expenditure.
“Effectively managing your finances in your 20s, particularly in the current economic conditions, requires comprehending and giving priority to your expenses,” Shimy explains. Begin by classifying your expenditures into essential necessities, desired luxuries, and funds allocated for either savings or outstanding obligations.
It is crucial to prioritize your needs above anything else. “For instance, expenses such as rent, groceries, and transportation,” he states. Next, designate a certain amount of money from your budget to savings, with the goal of establishing an emergency fund and making contributions towards your retirement. The remaining amount may be allocated for discretionary purposes, such as leisure activities and eating at restaurants.
3. Install a budgeting application
There is a wide array of budgeting applications that may be downloaded. These applications are ideal for young folks who may lack prior experience in budgeting. In addition, they often include pre-established categories, simplifying the initial setup process. All that is required is to complete the missing information.
Next, consider reading: “Top 7 Investment Applications for Novice Investors in 2024.”
4. Maintain a harmonious equilibrium between debt and savings.
Prioritize the repayment of your high-interest obligations, such as credit card payments, without delay, as previously said. Minimizing your debt allows for a greater portion of your income to be saved.
After successfully eliminating this load and establishing your emergency fund, you may next prioritize your savings objectives while simultaneously addressing other outstanding bills. “Integrating your savings and debt reduction is essential for constructing a prosperous budget,” Ryze asserts.
5. Seek an additional source of income if required.
If you struggle to save money due to insufficient income, you may want to explore a supplementary source of income that may be easily included into your schedule. Numerous part-time remote-friendly employment opportunities exist, including positions such as transcriber, data entry specialist, and virtual assistant. Does this not meet your specific requirements? Discover an additional 18 suggestions for generating income online specifically tailored for those who are new to the digital realm!
Avoid placing excessive strain on yourself
It is important to keep in mind that each person’s financial circumstances and history vary, so there is no need to worry about achieving a certain savings goal by the age of 25. Direct your attention towards enhancing your understanding of financial matters and begin the process of accumulating your savings at an early stage, ideally as soon as feasible, with a sensible sum that suits your current circumstances. As you progress in your professional journey and your income increases, your savings will inherently expand as well.
