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Soft savings are gaining ground in today’s economy
Only recently has there been a huge buzz around FIRE, an acronym that stands for Financial Independence, Retire Early, a movement based on the idea that managing your money very effectively can help you achieve financial freedom.
But it is becoming increasingly difficult to put aside enough money to achieve this.
“Young adults are feeling discouraged,” said Ted Rossman, senior industry analyst at Bankrate.
The recent acceleration in inflation has made it more difficult for those just starting out. More than half, or 53 percent, of Gen Zers say a high cost of living is a barrier to their financial success, according to a separate survey from Bank of America.
Young adults feel discouraged.
Ted Rossman
senior industry analyst at Bankrate
In addition to skyrocketing food and housing costs, millennials and Generation Z face other financial challenges that their parents did not encounter as young adults. Not only are their salaries lower than their parents were when they were in their 20s and 30s, but they also have larger student loan balances.
About three-quarters of Gen Z Americans said the current economy makes them hesitant to set long-term financial goals and two-thirds said they may never have enough money to retire anyway, according to Intuit.
Rather than cutting spending to increase savings, 73% of Gen Zers say they would rather have a better quality of life than extra money in the bank.
Gen Z workers make up the largest cohort of non-savers, Bankrate also found.
“As a wealth advisor, my radar goes up,” Kara Duckworth, managing director of client experience at Mercer Advisors, said of recent consultations with younger clients.
Many would rather spend their money on an extended trip, she said, than fill a savings account.
But “first and foremost, do you have an emergency fund?” she asks these customers.
Most financial experts recommend setting aside at least three to six months’ worth of expenses. If that seems unrealistic, consider saving enough to cover an emergency auto repair or dentist bill, Duckworth advised. “You need to have at least a certain amount of cash.”
Don’t overlook the power of compounding
Young adults also have a significant time advantage when it comes to saving for long-term goals like retirement.
“Every dollar you put aside in your 20s will grow over time,” Rossman said. The earlier you start, the more you will benefit from compound interest, where the money you earn is reinvested and earns even more.
“Compound interest is the eighth wonder of the world,” Rossman added, referencing an earlier comment Einstein reportedly said.
Even if you don’t put much aside, put enough in your 401(k) to at least get the full employer match, Rossman also advised. Then, choose to automatically increase your contributions, which will steadily increase the amount you save each year. “This can increase significantly over time.”
There’s no silver bullet, added Matt Schulz, chief credit analyst at LendingTree, but there are a few financial habits that pay off. “Most things about saving aren’t very complicated, but that doesn’t mean they’re easy to do,” he said.
“Just like having a healthy lifestyle, it’s just about doing the right things over and over again over time and being patient.”
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