The median weekly earnings for a full-time worker between the ages of 16 and 24 is $690 as of the third quarter of 2022, according to the U.S. Bureau of Labor Statistics. That works out to $35,880 per year.
The pressure to manage money wisely and the fear of losing it can be a source of significant stress. Moreover, the responsibility that comes with such earnings is immense. The general rule of thumb is that you should save 20% of your salary for retirement, emergencies, and long-term goals.
However, it’s important not to panic. Saving 20% of your paycheck may not be doable on a $35,880 salary. For many 21-year-olds, simply earning that much is unrealistic. You may not be able to work full time because you’re still in school or are surviving on a combination of part-time jobs and side hustles. Your savings rate is influenced by both your income and your expenses. If you live with your parents, saving money is a lot easier. If you have student loan debt, your expenses are higher, and you may prefer to focus on paying that off first.
At age 21, the habits you’re building matter a lot more than your actual savings balance.
Build your emergency fund: Regardless of your age, it’s essential to start building an emergency fund with three to six months’ worth of living expenses. The good news is that, when you’re 21, your living expenses are typically pretty low. If you have health insurance and you don’t have kids or own a home, you can probably get away with the three-month minimum. Try to budget a small amount of your income to put in a dedicated savings account, even if you can only manage $10 or $20 a week. Once you have a steady income, you can gradually work up to saving six months’ worth of expenses.
Avoid credit card debt: While student loans are a big source of worry for a lot of young people, credit cards are typically a far more toxic form of debt. The average interest rate when you carry a credit card balance is above 16%, which is much higher than the average interest rate for student loans. At age 21, you haven’t had too much time to amass a hefty credit card balance. Pay off any balance you have already acquired once you’ve set aside the money for your three-month emergency fund.
Invest to take advantage of compounding: When you’re in your early 20s, compound interest and earnings are especially powerful. If you can afford to invest in the stock market at this age, the payoff will likely be huge in retirement.
Tackle student loans selectively: If you have student loans, you may feel like your No. 1 financial goal is to pay them off as fast as possible. But not all student loans are equal — private loans generally have the highest interest rates and should be paid first. Then you can consider paying off more slowly any federal student loans with low interest rates as you also pursue other financial goals such as saving.
Don’t succumb to lifestyle inflation: The most important thing you can do now to reach your savings goals is to curb lifestyle inflation, which is the tendency we have to increase our living standard whenever we start making more money. At 21, you’re probably not living too lavishly yet. The longer you can maintain any frugal habits you’ve developed, the better off you’ll be.
It’s important to remember that financial success is not just about how much you earn, but also about how you manage your money. By developing good financial habits early on, you can set yourself up for a lifetime of financial success.
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