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According to Bankrate’s annual survey, only 44% of Americans can afford to pay for a $1,000 emergency with their savings — and that’s the good news. The bad news is that savings have been shrinking below historical levels since the height of the pandemic, when many of us were deferring expenses and receiving stimulus payments. Add the highest rates of inflation in decades into the mix, and most of us are probably even less prepared for a rainy day than we were before Covid struck.

Of course, being prepared is all about preparation.  Many Americans see their 50s as the time to start buckling down on retirement planning. For many, these are typically the highest-earning years, not to mention the time when the kids are finally taken off the household budget — kicking and screaming at times. 

However, planning (and saving) should begin decades earlier in our twenties. Indeed, most of our big money moves should have been made well before getting “over the hill.”
 

Twenties - Thirties

Putting away 10% of your salary in a Roth IRA or a company 401k is a great goal in your 20s. This builds a habit of saving, and you should be able to have your annual salary tucked away in savings by the time you hit 30 — assuming that you have been investing well and barring sustained economic downturns.

By the time your 30s roll around, then, your savings should have some healthy momentum. You should also have something even more valuable: experience. Surveys have shown that most of us have unrealistic expectations of what our money can make while we sleep. This is not necessarily our fault; we’ve lived during an unusually good time for certain investments. Though the stock market will return only about 9% per year over time, we’ve gotten used to double-digit returns lately. And last year, homeowners earned more money from the appreciation on their real estate than from working at their jobs. Passive income is great, as long as expectations are kept in check. Otherwise, we’re in for a rude awakening.

Any free cash during your thirties should be used to pay off remaining debt, including student loans. Only then, when you are debt-free, can you expect the law of compounding returns — which Albert Einstein called the eighth wonder of the world — to kick in. Following the rule of 72 and using an 8% annual return, your money will double in 9 years. What’s important is to maintain your monthly contributions to your IRA and/or 401-K and preferably increase them once you have paid off your debts.
 

Forties

At the start of your 40s, your nest egg should be big enough to buy a Ferrari, which you definitely should not do (though renting one for a day, if absolutely necessary, won’t break the bank). Better yet, your salary growth should be accelerating, allowing you to max out your retirement savings as you prepare for those winter years.

A word of advice: don’t start every new year with a grandiose resolution. Most of these are broken well before the end of January. Publishers (facetiously) call January-February of each year the “New Year, New You” period. We typically set big, vague goals like getting healthy, losing weight, being better with our money, and so on. Then we quit because YOLO or FOMO or whatever.

Believe it or not, you can be smart in your 20s, 30s and 40s. Nevertheless, as the Bankrate study mentioned at the forefront of this article states, being financially sound by your 50th birthday will not only take some discipline; it will require acting differently than most of those around you. 

This may be a hard pill to swallow when you’re still young and want to post amazing photos of your incredibly life for all to see, but it is one that you must swallow nonetheless. Your financial future — and your future self — is depending on it.