I’m 28 & Don’t Have A Savings Account. Help!

A year and a half ago (in the ~before times~), after a reshuffling in the Refinery29 office layout, I, the Money Diaries editor, was placed at a desk next to our Lifestyle Editor, Olivia Harrison. It was the beginning of a beautiful friendship filled with tasting ice cream, talking about the Real Housewives, and me unabashedly pestering Olivia about her personal finance habits. When I learned that she didn’t have a savings account or a credit card with rewards, I felt it was my calling to give her a bit of a money makeover. With her consent, I learned about her finances and then told her to bring me three financial goals. We then hopped on a Zoom call and took her financial planning skills from zero to hero. Ahead, Olivia’s money makeover — from credit to savings to understanding why the heck you should be contributing to a 401(k).

Olivia Harrison, Lifestyle Editor
Age: 28
Location: Brooklyn, NY
Salary: $70,000-$80,000
Money Goals: I want to open a savings account, get a credit card with rewards, and I want to know if I’m contributing correctly to my 401(k).

Hannah Rimm, Money Diaries Associate Editor: Why don’t you have a savings account?

Olivia: My mom was always like, "You don't need that," and I only did stuff that I learned from my parents, because I didn't get any financial education on anything outside of the home. I can pay rent, I can buy groceries, and I have enough where I'm just not thinking about money all the time. I'm just not engaging with it, I guess. I know it’s a really privileged thing. I see it in my checking account, but I don't think, Oh, should I be making it into more money? I also am someone who is very averse to thinking about the future because it makes me really anxious. I'm just trying to get through today.

Hannah: Having a separate savings account can help you manage your anxiety and also save for big purchases. Do you think you might want to own property someday?

Olivia: Yeah, so this is something that my partner and I do talk about because he actually is interested in daydreaming about the future. He has a lot more money than I do, because he invests and saves, but I would want to be able to contribute to a future down payment for a house.

Hannah: Okay, this is also why you create a savings account. They are really helpful because you can set them and forget about them. You can automatically set up a transfer from your checking to your savings every month for $100, $200, $500, whatever you want, and it just builds up in your savings over time. Then over time you're going to wake up one day and you're just going to be like, Oh my god, I have an extra $20,000 that I didn't even really think about because I'm just automatically putting away a little bit at a time. Another benefit is that if you have an emergency need for cash, like a large medical bill or you get laid off, it is very easy to access money in your savings account (as opposed to funds in long term investments/retirement accounts).

Olivia: So how do I start?

Hannah: Do you spend your whole paycheck? 

Olivia: No.

Hannah: Okay, so figure out how much extra you have every month and set an automatic payment of that amount to your savings account so that you can slowly, passively build up this money. You can also move bigger amounts of money over whenever you have extra.

Olivia: So once I open one, how much money do I put in?

Hannah: I would move the amount that lets you feel comfortable. That’s your anxiety amount. 

Olivia: How do I put money in it? Do I write a check or set a transfer?

Hannah: You transfer it! Once you open the account — at the same bank where you have a checking account — you’ll be able to go on the app or website and set a transfer to the account. Depending on your bank, you’re allowed a certain number of transfers a month — usually five to 10.

Olivia: Does the money I put in there increase? Like, is interest a thing?

Hannah: So a regular savings account with your bank probably has interest of .01% or something minuscule. That being said, that's why people have high yield savings accounts, because when the rates are high (which they are not right now, because the Federal Reserve lowered them in response to the pandemic), you can get around 2% interest. Currently, high yield savings accounts like Ally are offering .5%. If you had $10,000 in there you make 50 bucks a year, which isn’t really worth having to deal with the hassle of banking somewhere not connected directly to your checking account, so I wouldn’t recommend it for your first savings account. Because that’s the other thing about high yield savings accounts: They are usually online banks that would require adding a second bank to your life (and another bank to check in on). Once you get used to saving and feel comfortable with your money in more than one place, then I would recommend moving your emergency savings to a high yield savings account.

Olivia: Okay, I feel good about that.

Hannah: Okay, now let’s get you a better credit card! Do you use a credit card right now?

Olivia: I do now, but my parents — I think this is a Boomer thing — are very “credit card debt is evil, do not even mess with that shit.” So my parents never wanted me to get a credit card.

Hannah: Here's the thing, credit card debt, which is consumer debt, can be very bad because many credit cards have very high interest rates if you don’t pay your credit card off in full every month. This is how people get stuck in a cycle of debt. However, having a credit card and paying it off every month — or even routinely paying it off every week — gives you the ability to grow your credit score, which you need to get an apartment, business loans, and mortgages. What is the credit card that you have now?

Olivia: Okay, so when I moved to New York, I had never had a credit card and therefore didn’t have credit so it was really hard to get an apartment. That’s when I ignored my parents’ bad advice and got the only one that would approve me, which was a starter card from a big bank. I started with only a few hundred dollars of credit and have increased my limit over time.

Hannah: How much of your daily spending is on your credit card?

Olivia: I try to put all of my expenses on it now.

Hannah: Okay, great. And do you get any rewards?

Olivia: No, I don't get any rewards.

Hannah: Okay. So, this has been a great starter credit card to get you credit and get you used to having a credit card. Now, it’s time to get a nicer credit card that might cost a little bit of money but you get a lot of rewards. For example, when I got my current travel rewards card, I was able to go to Australia for free. 

Olivia: That's awesome. Okay, so when I get this new credit card, do I keep my old card or is this something that I close out?

Hannah: Okay so for credit score reasons it is best to keep both of your credit cards and make one or two purchases a month on the old card. This will raise your credit score because the amount of money you spend every month will be lower vs the amount of credit you have (because you’ll have two different credit lines). That being said, I ended up closing my starter card because it wasn’t serving me at all and it was giving me anxiety to have a second card with no real rewards.

Olivia: Yeah, minimizing anxiety is the sole motivator of every move I make.

Hannah: Oh, one other thing about the higher value travel cards, there will be a yearly fee. It’s usually anywhere between $100-$500 a year.

Olivia: Okay. I didn't know you had to pay for special credit cards.

Hannah: Yeah. A lot of travel credit cards that give you perks cost money. There are rewards cards, such as cashback cards, that don’t cost money, but if you want a travel card, it will cost you a bit.

Olivia: That's so funny, what a weird system we live in.

Hannah: Okay, let’s talk about your 401(k). You want to make sure you're maxing out the match from the company. To do this you can log into your 401(k) account and see what percentage you are contributing. It's actually really fun to do because then you feel so rich, because you're like, "I didn't realize that I have so much money in my 401(k)!" The gold standard of your total contribution (your contribution plus your company match) was previously around 10%, but since we live longer that number has increased to 15% or more. If you want to retire at 67 and have $50,000 a year from your 401k, you’ll need roughly $1 million in your account when you retire. You can use this calculator to play around with exactly how much you want to have/how much you have to save.

Olivia: Interesting, okay. Yeah, I’ve had a 401(k) for about four years — since I was hired full-time by Refinery29. Before that, I was freelancing and before that, I was in college. I was aware I had a 401(k) when I got this job, but I don’t think I even looked at it until maybe a year later because I didn’t understand what it was or how much I should be contributing. I think either someone in HR gave a presentation or a co-worker told me how much the company matched, and I finally adjusted my contribution amount with that info. 

Hannah: Okay, that’s good to know. Because you are in a good financial position and we have a company match, you definitely want to be contributing at least up to the company match. For example, if your company will match you 100% up to 5% of your salary (so they’ll double your monthly contribution), you want to make sure you are contributing at least 5%. If you remain in a good financial position (you can comfortably afford all your bills and day-to-day expenses) you’ll want to keep contributing. However, if, say, your spouse suddenly gets laid off, or you have an unexpected large expense, it’s okay to pause your 401(k) contribution for a while until you’re stable again. It is also okay to wait to start a 401(k) until you make enough money to cover your bills and day-to-day expenses ,if you don’t have any kind of emergency fund. This doesn’t apply specifically to you, but if you were making $30,000 living in NYC and had no savings to speak of, I would say it is okay to build up your savings for now before you save for retirement.

Olivia: That makes sense.

Hannah: Oh, and the other thing is that you want to make sure, and write this down, that you are currently doing a Roth 401(k). This means your contribution is AFTER taxes instead of before. You are making probably less money now than you are going to be later in your life, so you want them to take the tax out now as opposed to when you retire. If you expect in your lifetime that this will not be the highest salary that you will make then make sure it’s a Roth 401(k).

Olivia: Gotcha, that’s definitely not something I understood. I do not currently have a Roth 401(k). I remember seeing that there were different options and trying to make a decision about what was best but it didn’t make any sense to me before, so I just went with the default. To be honest, none of this really made sense to me. I’m not sure I even totally get what a 401(k) is?

Hannah: A 401(k) is a company-sponsored long term investment account. Basically you give your money (and sometimes some of the company’s money) to a retirement investment company and they invest it very safely for you. It's making money over time because they're not putting it in volatile markets. It will have long term slow growth. It’s similar to a pension.

Olivia: Okay, got it. And what about if I change jobs or get laid off? What do I do then?

Hannah: Great question! If you go from having a job with a 401(k) to having no job, you have a few options. If you have more than $5,000 in your account you can leave it there and it will continue to collect interest until you retire (or the company closes that 401(k) account). You can also roll it over in an IRA account, which is similar to a 401(k) but not tied to an employer. If it’s less than $5,000, you can cash it out penalty-free, but you’ll have to pay taxes on it. If you go from one job with a 401(k) to another job with a 401(k) you can rollover your original 401(k) into your new 401(k), which means you just transfer your balance from one account to another. This is usually relatively simple, I would recommend calling your 401(k) company and they’ll walk you through it.

Olivia: This is very good to know. And when can I access my 401(k)?

Hannah: You can start accessing the money without penalty when you are 59 ½. Before then, there is a penalty for removing funds (it depends how much money, but usually 10%) and you’ll have to pay taxes as well. It’s a little bit different during the pandemic as the CARES act temporarily allows you to remove up to $100,000 from your 401(k) without the 10% penalty, but you still have to pay taxes. Basically, if you can, don’t remove the money until you’re ready to retire.

Olivia: Sounds good.

Hannah: Any other questions?

Olivia: I think I’m good.

Hannah: Oh my god, you can do this. I’m so excited for you. You’re going to get to have the sexy, hard, metal card. And a savings account!

Olivia: Well, thank you, thank you for helping me.

Hannah: Literally anytime.

Olivia here! Hannah and I had this conversation on a Thursday afternoon, and by the next morning, I had  opened a savings account, gotten a new rewards credit card, and tweaked my 401(k) to work for me. My biggest takeaway from this money makeover was that so much of this stuff is way more simple than it seems. It took a little time for Hannah to explain the basics of what a 401(k) is or why you should use a credit card with rewards or open a savings account, but accomplishing the actual tasks seriously took like 20 minutes.

True story: For the past four years, I’ve had a note in my phone that says, “New Years resolution 2017 — open a savings account.” I hadn’t been able to bring myself to tackle the task because I thought it would be time consuming and confusing. I think for a lot of people, personal finance decisions feel really complicated, but most of the time, depending on your financial situation, these little tweaks are pretty straightforward and the benefits are huge. If you’re in that camp, I’m here to tell you: It actually isn’t as hard as you thought. There’s no need to let these money moves hang over your head for years like I did.