When you’re in your 20s, 30s, or even 40s, retirement may seem like a lifetime away—something you may not need to plan for just yet. But is it ever too early to start preparing yourself for a future of financial independence? Absolutely not. The best time to start planning for retirement is the day you get your first paycheck.
Starting your retirement preparation when you’re as young as 25 means you have time on your side to start building good habits and compounding savings. Here are four easy ways to start planning in your 20s to become financially independent in the future:
Start budgeting and record keeping.
The key to saving money is simple: spend less than you make. A vital habit of learning when you’re young that will follow you throughout your adulthood is how to live below your means. Your goal should be to live on only 85% of your income. The additional 15% should be put away into some form of savings or investments.
Keep a record of your spending. There are countless apps and spreadsheet templates available to help you track your spending and income. Seeing exactly how much money you have coming in and out of your wallet will help you make smarter financial decisions.
Know and take advantage of your employee benefits.
When you start a full-time job, your employer will likely offer a range of benefits.
Understand compounding.
One of the most valuable things you have in your 20s is time. It is far easier to grow money over 50 years than over 25. In any account that is either invested or accruing interest, having more time to let the money grow could mean doubling, tripling, or even quadrupling your savings.
Avoid adverse debt or have a plan to get out of debt.
Not all debt is bad. Debt used to buy a home or start a business has collateral and can be used as leverage. This can be good debt. Consumer debt is always bad. This includes credit cards, car loans and student loans. Because of high-interest rates, making a habit of racking up debt when you’re young will only hurt you more and more as you get older.
The rule of thumb for staying out of debt is not buying anything you cannot afford. But in our imperfect world, that’s easier said than done. If you do have debt, or if you need to use debt for a major purchase, have a formal plan to get out of it.
One way to do this is by reducing your spending. Find places where you can cut costs responsibly, like getting a roommate, cancelling the gym membership you keep telling yourself you’ll use or opting to make your lunch or coffee at home.
If you can’t reduce your spending, it may be time to try to increase your income. Seeking a higher-paid position, starting a second job or increasing your hours could bring in more money to help pay off what you owe.
The lesson:
If you’re asking yourself if it’s too soon to start planning for retirement, the answer is always going to be no. Start preparing as soon as you start earning an income and you’ll be better off in the future. The one thing you can’t make more of is time, and the one thing you can’t borrow for is retirement. Getting into the habit of saving money and making sound financial decisions while you’re in your 20s will follow you throughout your life and into your retirement. By Eric Brotman, CEO of BFG Financial Advisors, host of the Don’t Retire… Graduate! podcast, and author of the award-winning book Don’t Retire… Graduate! Forbes.com
