It’s a sad fact that most Americans are not good at personal finance and do not know how to save, which is probably why we’re in so much debt. As I begin a new job I begin to think about the importance of saving for retirement. My company has automatic 401(k) enrollment and one needs to opt-out if they decide not to participate. If has been found that if automatic enrollment exists, 96% of people end up participating in their 401(k) plan as opposed to only one third if there is no automatic enrollment. This I think is a service to people who may not take the initiative to enroll or even think about saving for retirement until it’s too late.
A study also shows that those who simply plan or calculate how much they should save are more successful at it. Baby Boomers who did a lot of planning had a median net worth of $200,000 while those who did the least planning had $84,000. So what about someone just out of college like me? What can a twenty-something do to start saving? It is sad to say that a number of people my age I have encountered believe even a 3% contribution to a retirement account is too much considering the cost of living. As I once heard Chris Farrell say on Marketplace Money, unless you’re below the poverty level, there is no excuse not to save something. It’s true, a small contribution won’t even be noticed. People also need to be more educated about money and the importance of saving. I attribute my knowledge and desire to save to my reading of Money Magazine and listening to Marketplace regularly.
Saving at 20-something
- First, start with a budget. Pear Budget is perfect and makes tracking your money so easy. At a glance, you can see if you’re spending too much or how much you can spend on things like entertainment.
- Open an online savings account like HSBC Direct or EmigrantDirect. These accounts provide high returns and setting up an automatic savings plan allows you to regularly stash aside some money each week or month without even thinking about it.
- Compare your budgeted spending amount each month with your total income each month. If your company offers a 401(k) plan, determine the percentage of your income you can contribute each month. Keep in mind that you can be more generous while young since you have less expenses right now.
- Once you have saved enough in your online account you may wish to put some of it towards another retirement option such as a mutual fund. Vanguard offers “Target Retirement Funds” which have a retirement date attached to them. The fund’s allocations adjust depending on your age and how close you are to retirement. It’s an easy way to invest in the market for the purpose of retirement while someone else does the dirty work. And, if you need to, you can sell the fund whenever if you need the money. The initial amount to buy is $3,000.
It is important to have some money in a 401(k) (especially if the company matches) as well in other savings vehicles or the stock market. You can buy the Vanguard mutual fund through Vanguard or other brokers like Zecco, a free trading site.
Another idea for saving is putting a large percentage of unusual or extra income like bonuses immediately into savings. Treat yourself a little but if you budget yourself and do fine on your regular income, take advantage of the extra free money by investing/saving it. You’ll appreciate the return in the long run thanks to the power of your friend compounding paired with regular contributions.
- Let’s say we put $3,000 into a Target Retirement Fund and decide to contribute $300 a month to begin and after 5 years we are making more and contribute $800 monthly. After another 25 years we will have saved $961,582, assuming an 8% return.
- If we contributed $800 to that original $3k monthly for 30 years, we would end up with $1,233,043 after 30 years. Contributing as much as possible as often as possible really adds up.
- Short term: Put $300 into your online savings account each month and after 5 years you’ll have more than $20,000.
Do your own savings calculations here. Divide your savings at retirement by the number of years left to live and see how comfortable you may live. Keep in mind inflation will make that delightful number worth half of what it does today in 30 years.
While right now you may not need to be thinking about how long you’ll live and how the life expectancy is increasing, do save as much as possible. There is a reward in saving and you’ll definitely feel it as well as feeling more personally responsible. Money Magazine had a great article on where to put $5,000. So if you have an extra five grand kickin’ around, invest it or save it. By the way, the Vanguard Target Retirement Funds were recommended by both Money Magazine and Marketplace. They’re called life-cycle funds.
Of course, if you have any credit card debt, pay that off first before you put your saved money elsewhere.
