Make room for retirement savings in your budget now instead of later
When you’re starting out in the workforce, making your paycheck last until the end of the month can be overwhelming, especially given the rising cost of living in recent years.
Although it’s tempting to postpone saving for retirement until you’re more financially secure, at this stage in your life even a modest contribution to a 401(k) or other retirement savings plan will add up significantly over time.
It’s also important to build saving into your budget, says Jim Crider, a certified financial planner in New Braunfels, Texas. And though it’s simplistic to suggest that millennials and Gen Z’ers can solve their money problems by giving up expensive coffee drinks and avocado toast, such expenses can add to “lifestyle creep,” Crider says. “It’s not about the latte, it’s about the habits you’re building.”
Start by conducting an audit of all your expenses over the past three months, says Brittany Wolff, a CFP in Greenville, South Carolina. You can download a budget app to track your spending or create your own spreadsheet. Use your bank account and credit card statements to track spending; many financial institutions provide a breakdown of expenses by category.
Once you’ve completed this exercise, you may be able to identify things you can live without, Wolff says. “I’m not asking you to remove something you value and enjoy, but almost everyone I go through an audit with sees something they didn’t realize they were spending money on.”
In 2024, workers younger than 50 can stash up to $23,000 in a 401(k) or similar employer-sponsored plan. Most young workers can’t afford to save anywhere near that much, but there’s a good chance your employer will give your savings some rocket fuel. Formulas vary, but often an employer matches $1 for every $1 you contribute up to 3% of your salary, followed by 50 cents for every dollar you contribute up to the next 2% of your salary.
Even a small contribution, plus a match, will grow and compound over time. The balance will grow even faster if you increase contributions. Many employers allow you to automatically ratchet up contributions to your 401(k) by 1% to 3% of salary a year.
“As counterintuitive as it sounds, when you’re young and broke is actually the perfect time to start investing,” says Madison Sharick, a CFP in Pittsburgh.
Pay attention to vesting, too. Depending on your employer’s policies, you may lose matching funds if you leave your job before a specified period has passed. For example, you may not be entitled to 100% of matching funds unless you remain on the job for at least three years.
It’s not unusual for young workers to change jobs frequently, but it’s worth considering what you might be giving up if you accept an offer from a different employer.