What you should know about saving money in your 20s

Saving money in your 20s should be a top priority for young people — but it’s not. A staggering 44% of young people ages 18 to 24 have $0 in their savings accounts, or they don’t have a savings account at all, found a GOBankingRates survey. And among all Americans, 62% of them have less than $1,000 in savings.

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No matter your age, you should have some type of savings plan so you can one day buy a house, go on a luxurious vacation or even retire when you want. Learn everything you need to know about saving money in your 20s.

Even if you start with saving just $1 more a week, it’s important to establish a savings habit while you’re young. Start saving small, painless amounts and watch your savings account balance grow. You’ll be building your discipline to save money — and it’ll motivate you to find ways to stop wasting money.

Have you ever heard the financial advice “pay yourself first”? That means you should be putting a bit of each paycheck into your savings account before bills and expenses even get close to your money. Save as little or as much as you can.

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Make sure you have more money coming in than going out. Overspending is the biggest financial problem for many, but you can control your spending by creating a budget, living a lifestyle that’s realistic for your income and working toward healthy spending habits.

For others, a low income might be the problem. If you’re in this boat, get proactive and look for professional opportunities that can increase your paycheck, like promotions, networking, vocational training or more education.

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You probably have many plans, dreams and goals, from traveling and earning a degree to buying a home and getting married. Whatever you envision for your life, more often than not you’ll need money to make it happen. But money to cover those expenses doesn’t just materialize — you have to save it up. Turn your dreams into realities by setting concrete savings goals.

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Saving an emergency fund will protect you and help keep your finances on track. Even when life hits you with unexpected or big expenses, an emergency fund will act as a financial buffer. So instead of spending the money you saved for other goals — like paying for college — you can use your emergency fund to cover the unexpected expense.

But how much should you save for an emergency fund? Personal finance expert Dave Ramsey advises you should start out with a $1,000 emergency fund, while other personal finance experts suggest saving a few months’ worth of expenses. Once you have that baseline started, work your way up to having three to six months’ worth of expenses saved to cover bigger financial troubles, like unemployment or emergency medical bills.

Those who have great savings habits set goals and work hard to achieve them. After setting your goals — like paying for a trip or buying a home in five years — break them into smaller steps. Savers know how much they have to save each month to achieve long- and short-term savings goals, from this year all the way to retirement. And, they use those goals as motivation to stay on track and avoid unnecessary expenses.

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Setting a savings goal is an exercise in futility if you don’t figure out a system for saving money that works for you. Stay organized, be able to quickly and easily track your progress, and make adjustments as needed. Some people track savings for different goals using a spreadsheet, while others might actually create different savings accounts or sub-savings accounts to easily keep track of funds slated for different purposes.

While personal finance experts will have varying opinions on the appropriate amount to save, the advice to save 10% of your income is a good starting point. Other guidelines suggest saving as much as 20% of your income, like the 50-30-20 rule that says 50% of income should cover needs — like rent, groceries and transportation — 30% should cover wants — dining out, vacations or donations — and 20% should go to savings or debts.

Ultimately, what you can or should save will be decided by your income, expenses, debts, goals and even your location. Depending on the cost of living in your city, you might want to move to a city that’s better for your budget.

While saving money will always be an important part of your financial health, it’s not the answer to every money question. At times, your financial situation might call for you to put more of your funds toward other goals, like paying down debt, covering education or medical costs, investing or even covering day-to-day expenses when money gets tight. Once you have an emergency fund saved up, funds might be better allocated to other goals.

Start saving for retirement in your 20s, and you’ll have to put away less money every month. The money you save in your 20s will be worth more in retirement than the money you’ll save in your 30s or 40s.

For example, a 25-year-old who saves $600 every year will have $24,000 saved up for retirement by the time they reach 65 — and that’s not even including any interest earned on the balance. Meanwhile, a 35-year-old who saves at the same rate will only have only $18,000 saved up. In order to reach $24,000 by age 65, the 35-year-old would have to immediately start saving $800 a year.

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If your employer offers a 401(k) match, you should absolutely take advantage of this benefit. While it will make your paychecks a tiny bit smaller, claiming that contribution will also mean you’re automatically upping your yearly compensation. Skipping out on these 401(k) contributions, however, means you’re walking away from free money — possibly thousands of dollars a year. It’s an easy and nearly painless way to start saving for retirement in your 20s that will pay off big later.

If you’re just stashing cash in whatever account your bank handed you, you could be missing out on better savings vehicles. Here are the most common savings accounts banks and credit unions offer:

• Traditional savings accounts typically offer lower interest rates than money market accounts, but they might carry fewer fees.
• Money market accounts have traditionally offered better rates in exchange for higher balance requirements and a few more restrictions.
• Certificates of deposit (CD accounts) keep funds locked up for a set amount of time — usually from a month up to a few years — and might offer better rates than savings accounts.

There are additional savings accounts built for specific goals, like holiday savings accounts, health savings accounts, retirement accounts like 401(k)s and IRAs, 529 college savings accounts and even vacation savings accounts.

A liquid account keeps money readily accessible and easy to transfer into cash — like a checking account. A savings account is slightly less liquid, as these are federally required to limit withdrawals to six per month, with each withdrawal above that carrying a fee.

Some of the least-liquid savings vehicles are CDs and retirement accounts, like 401(k)s and IRAs. These types of accounts tend to penalize account holders for early withdrawals.

Liquid savings accounts are great for emergency savings and short-term goals, but use the less liquid accounts for long-term goals and retirement savings.

Rumor has it Albert Einstein named compound interest as the most powerful force in the universe — and he might have a point.

There are two main types of interest: simple interest and compounding interest. Simple interest, which is sometimes called nominal interest, pays you only on your balance and not on the interest earned. When interest is compounded, however, the interest earned is added to your balance, and future interest is calculated on the balance just boosted by the added interest.

Nearly all modern savings accounts offer compound interest, though some will compound daily while others compound only semi-annually. That’s the magical force that makes it so advantageous to start saving money in your 20s, as it will give your money a longer time to earn interest — and then earn interest on that interest.

Despite different savings account rates and compounding policies, comparing rates between banks is easy when you look at the annual percentage yield (APY) offered on an account.

The APY takes the rate and how it will be compounded, simplifying it into a neat figure of the interest that would be earned on money deposited in the account for a year. All it takes is a glance at two APYs to see which account would grow your money faster. The higher the APY, the faster your money will grow.

According to the Federal Deposit Insurance Corporation (FDIC), which insures many banks in the U.S., the average savings account rate is 0.06% APY. Meanwhile, the average money market account rate is 0.08% APY for deposits less than $100,000 and 0.12% APY for deposits of $100,000 or more.

Deposit rates are currently pretty low. But, it’s possible interest rates will increase in the near future. So, you might start to see small increases in savings account rates soon.

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However, you can take advantage of the best savings accounts on the market today. Many of them offer higher-than-average interest rates. For example, Synchrony Bank boasts an impressive 2.20% APY on its high-yield savings accounts, and Ally Bank offers 0.50% APY.

While saving money is a habit you can cultivate, you can also have your bank do the work for you. Many banks provide an automatic transfer option that allows you to schedule transfers from one account to another at a predetermined time.

For example, you can automate $250 to your savings account on the first of every month. Alternately, you might be able to set up direct deposit through your employer to automatically funnel a portion of each paycheck into your savings account.

The IRS offers a tax credit that rewards lower-income taxpayers for saving for retirement, called the retirement savings contributions credit — or simply the saver’s credit. You can take advantage of the 2016 saver’s credit if you have an adjusted gross income (AGI) of $30,750 or less, but the income limits are greater for heads of households and married couples filing jointly.

Depending on your AGI, “the amount of the credit is 50%, 20% or 10% of your retirement plan or IRA contributions up to $2,000” — $4,000 if you’re married filing jointly, states the IRS.

As every millennial knows, your phone can be the best tool you have in your pocket. That’s even true when it comes to saving money in your 20s.

If you need to create a budget that matches your financial reality, try the Level Money app. For tracking daily spending and savings progress, try Mint. And if you have a hard time finding the extra funds in your budget for saving, try money-saving app Digit, which tracks your finances and adjusts savings accordingly, funneling money into your savings account in such a way that you never miss it.

Many banks also offer their own versions of spending and budget trackers. Check with your financial institution to see which mobile savings tools are available.

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This article originally appeared on GOBankingRates.com: 20 Things You Should Know About Saving Money in Your 20s