Building wealth when you’re in your 20s might seem challenging when you’re navigating the workforce, paying bills, and trying to figure out how to build the life you want. But according to the latest report from the Transamerica Center for Retirement Studies, many Gen Z workers are, in fact, saving for retirement.1
Taking simple steps when you’re young can help you build success later on in life. Even if you don’t have a lot of money, you can start to set up plans that can make it easier to reach your goals as you get older.
"In my experience, most folks in their 20s are overwhelmed by all the financial decisions they face," says Lori Carver, CFP®, ChFC®, and Senior Vice President of First Horizon Family Office Services.
That includes how to budget, what insurance to get, and how to save when you have student loan debt.
The best way to overcome these challenges, says Carver, is to understand where your money is coming and going, how much you have, and use that knowledge to build a roadmap that personalizes your financial goals.
Following some of these steps when you’re in your 20s can lay the groundwork for a solid financial foundation.
#1 Make and Keep a Budget
One of the first things to do as you start building wealth is to get a budget and stick to it. Find a system that works for you. That could be the 50/30/20 budget rule, where 50% of your money goes toward "musts" like bills, 30% to "wants," such as shopping or entertainment, and 20% goes toward savings and debt. You can also try the zero-based budgeting technique, which requires every expense to be justified, or a combination of different techniques.
The important thing is to know where your money is going. Many banks offer online budgeting tools or apps, says Carver. First Horizon, for example, has a financial wellness tab that automatically creates a budget based on account activity.
If you're just starting out, Carver recommends checking your budget monthly.
"First-time budgeters sometimes miss small things (think shopping runs, morning coffee or soda on the way to work, etc.). By reviewing your budget monthly, you can incorporate those things and get more accurate over time," she says.
Once you have your budget down, you can consider reviewing it every three to six months, she added.
#2 Build an Emergency Fund
Sometimes unexpected things happen in life, such as your car breaking down or having an unexpected medical emergency. These events can take a large financial toll if you’re not prepared.
When you’re young, you should be working toward building up your savings, so you’re not hit with financial struggles early on.
Many experts recommend having at least three to six months of living expenses set aside in a savings account. Carver says building an emergency fund is as important as building a foundation for a house. You don't want to have to tap into your other savings goals to pay for an unexpected flat tire, she explains.
"An emergency fund of three to six months of expenses for those who have W-2 employment, or six to 12 months for those who are self-employed, can not only cover emergencies but is also a good way to get in the habit of saving money regularly," Carver says.
#3 Avoid Debt and Live Below Your Means
High-interest debt can prevent you from building your savings and investment accounts. According to Carver, planning for major expenses like buying a car or taking a vacation – and sticking to your budget – is one of the best ways to avoid debt.
"If you have too much debt or are solely focused on paying down debt, you may not be saving any money," says Carver.
While certain types of debt, like mortgages or student loans, can be necessary to build the life you want, it's wise to avoid unnecessary debt, such as credit cards. Carver's advice for staying debt-free? Live below your means.
"Having a good handle on your finances and living within your means are the best ways to avoid debt," Carver says.
And if you do find yourself in debt that feels overwhelming, Carver recommends working with a financial planner to set a realistic plan to pay if off.
#4 Look Into Tax-Advantaged Accounts
Carver is a strong advocate of using tax-advantaged retirement accounts to start building wealth.
Accounts like individual retirement accounts (IRAs) and 401(k) plans offer tax benefits that allow your investments to grow on a tax-deferred or tax-exempt basis. That means, depending on the type of account, you may either pay the taxes later, usually when you retire, or potentially owe little to no tax on your gains.
In addition, if your employer offers contribution matches with a 401(k) plan, "don't miss out on the opportunity to take advantage of it," advises Carver. She also recommends increasing your contributions by 1% every year.
"You don't miss what you don't see," she says.
#5 Automate Your Savings
Automating your savings is another way to easily build your wealth. Many banks allow you to automatically set aside a portion of your paycheck into your savings or investing account before it even hits your checking account.
Setting up automatic deposits allows you to save consistently without needing to think about it. It can also make budgeting and saving easier. If the money isn't easily accessible, then you'll be less tempted to spend that money.
"You know that saying, 'Out of sight, out of mind'? Having funds taken directly from your pay is an excellent way to save money on autopilot," says Carver.
Another way to automate your savings is to use round-up apps, which save your spare change by rounding up what you spend on everyday purchases. Some apps deposit this rounded-up amount directly into a savings account, while others invest it in stocks to help grow your savings.
#6 Understand the Power of Compound Interest
One of the reasons that investing is such a popular way to build wealth is because of compound interest. “When you begin to invest early, compound interest can lead to exponential growth,” says Carver.
Simply put, compound investing is when you invest your money, and it earns returns. Then if you reinvest those returns, it can earn even more money. After several years and decades, the compounding accumulates, significantly increasing your wealth.
You can begin investing with a modest income or savings. Starting to invest in your 20s significantly increases the potential for wealth accumulation by retirement, even with smaller contributions, thanks to the power of compound interest. As Carver explains, if you have invested $5,000 per year in a Roth IRA at 25 with 6% interest, in 20 years you would have $199,000.
#7 Educate Yourself
As your savings grows and your career changes, so will your financial goals. Stay on top of your long-term goals by educating yourself about what's possible. It's always best to seek advice from a professional who can help you navigate the complex world of investing.
First Horizon Advisors can help strengthen your financial foundations by providing personalized financial planning or suggesting an investing plan that can help you reach your short- and long-term financial goals.
Never Too Early (or Late) to Start Building Wealth
Regardless of whether you open a Roth IRA account when you’re 18 and invest your part-time earnings or wait until you’re in your late 20s to save for retirement, the important step is to get started and keep at it.
Accumulating wealth is a gradual process, and starting early gives you more time to increase your savings. Working with a professional can help you develop a financial plan that fits your lifestyle.
"It is never too early to start talking to a financial planner...[they] will help define goals that match your individual or family values, and help you reach those goals," Carver says.
1 Transamerica Center for Retirement Studies. "The Multigenerational Workforce: Life, Work, & Retirement 24th Annual Transamerica Retirement Survey of Workers." Published June 2024. Accessed December 2024.
