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Why You Should Save for Retirement When You're Young and Broke

By Christy Bieber - Jan 24, 2020 at 11:05AM

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There are two big reasons, even though it may feel impossible.

When you're young and just getting your life established, chances are good your income isn't huge and there are lots of demands on it. You may have student loans to repay, dreams of buying a house, plans to start a family, or a desire to see the world.  

When you have so many things you want to do, setting aside a whole bunch of cash in a retirement account probably isn't at the top of your list -- especially since retirement is so far away. 

But starting to save when you're young and broke is absolutely essential. And there are two big reasons why. 

Young person wearing a college graduation outfit with a dollar sign for a tassle.

Image source: Getty Images.

1. Compound interest means you'll have to save much less

The single biggest reason you need to start investing for retirement ASAP is that it enables you to save much less and still end up with a hefty account balance. The chart below demonstrates why it's so important to start saving early. 

Age You Start Saving

Annual Investment Needed to Save $1 Million by 65 (at a 7% Annual Return)















Calculations by author.

The discrepancy is so big because if you start saving when you're young, your money works for you for many more years through compound interest. The returns you earn will be reinvested, and you'll begin earning returns on this money as well, which seriously accelerates the growth of your account balance.

2. Demands on your money are only going to increase

It may seem difficult to save even a few thousand dollars a year when you're young and broke. But unfortunately, it's not necessarily going to get any easier to find spare cash as you get older. While your salary is likely to go up as you develop professional experience, demands on your money will also increase. 

In fact, according to the Bureau of Labor Statistics, the mean average annual expenditures are:

  • $32,039 for consumers under 25.
  • $56,457 for consumers 25 to 32.
  • $71,198 for consumers 35 to 44.
  • $75,387 for consumers 45 to 55.

Some of this increased spending comes from improving your quality of life by doing things such as dining out more. But many people also have additional expenses associated with commuting to work, buying a home, and raising a family. Added expenses associated with life milestones such as having children can make it much harder to save money in your 30s, 40s and 50s than in your 20s. 

How to start saving when you're young

Although it's clear why it's important to start young, this doesn't make it any easier to put aside thousands of dollars a year if you feel like you don't have any spare cash. But for many young people, it is doable. If you want to find money to save in your 20s:

  • Live on a budget: By planning out your spending and prioritizing saving, you can make sure you're investing what you need.
  • Live like a college student: Instead of upgrading your lifestyle by getting a new car or apartment after graduation, keep your costs of living as low as possible to save more. 
  • Take advantage of family help: If you can move back home with parents or other relatives for a short time after graduating from college, you could really supercharge your savings.
  • Consider a side job: If you have a few spare hours, look into driving for a ridesharing company, starting an Etsy shop, doing overtime at work, or otherwise finding a way to bring in extra income to save. 
  • Saving "found" money: If you get a monetary gift, a tax refund, money from rebates, or other unexpected cash, invest it instead of spending it. 

By sacrificing a little bit when you're young, you'll make life a whole lot easier as you get older because you'll already have a large retirement account and won't need to invest as much later in life. 

Procrastinating doesn't pay

The longer you wait, the more you'll have to save and the harder it will be to achieve financial security in your later years. You owe it to your future self to find a way to put aside a little cash, even if you're young and broke. 

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