When you’re a young adult and just starting out on your own, you have a great opportunity to set yourself up for a comfortable life. You may have to deal with student loans or other debt, but if you can also focus on saving now, it’ll be easier to reach your financial dreams than if you wait until you’re older to put money aside.
Here are some money goals that you can achieve by saving small amounts, if you also start early.
Build an emergency fund
If you lose your job or face a large, unexpected bill, having a savings account that you use for emergencies could help you get through your rough patch without going into debt. Financial experts say a good emergency fund should cover between three and six months of expenses. If you normally spend $2,000 a month, you’ll need about $12,000 on hand for a six-month emergency fund.
That may seem like a lot, but it’s doable if you put aside a little bit of every paycheck. Move money from your checking to savings account at a financial institution that offers free automatic transfers, such as Idaho Central Credit Union. If you get paid every two weeks and stash $100 each time, you’ll have a fully funded six-month emergency cushion in less than five years.
Save for retirement
If your employer offers a 401(k) retirement plan and will match a percentage of your contributions, it makes sense to contribute at least up to the amount your employer matches. In addition to a 401(k), it’s smart to maximize your savings with a Roth or traditional IRA. These retirement accounts can offer tax benefits, and because of the beauty of compound returns, in which your returns are added to your savings and earn a return of their own, your money could grow quickly if you start saving early.
Buy a house
After you’ve built up an emergency fund and started saving for retirement, you might also consider an affordable home mortgage. Real estate can be a great investment with tax advantages.
Ideally, you’ll have a down payment of at least 20% to avoid paying private mortgage insurance, though many lenders have loan programs with lower down payment requirements. You’ll also want to consider other fees associated with buying a home, such as closing costs, taxes, appraisals and moving expenses.
Try setting up automatic deposits into a savings account at your financial institution to fund your down payment, just as you did with your emergency fund.
Start your kids’ college funds
If you have children, or plan to, you can take advantage of compound growth to save for their education. You could open a Coverdell education savings account, an investment account in which your earnings might grow tax-free. Coverdell accounts can pay costs for elementary and secondary school as well as for college.
Even though you’re young, it’s important to set goals for yourself and save toward those goals. When you have a plan for emergencies, retirement, home and family, you’re on your way to financial satisfaction.
Margarette Burnette, NerdWallet
