Life After College: How To Make Your Money Work For You
Posted October 4, 2018 9:04 p.m. EDT
You’re 22 and just got your first paycheck. You could blow it all or …
We all know we should be saving money, but who really wants to? Meet up with friends for drinks — you work hard. Buy those concert tickets — when’s that band coming back next? We think that if we save, we miss out. It does not have to be that way.
Saving has a simple, almost magical, power. The sooner you start, the more your money grows, and the easier it gets to maintain the habit. You may not be earning much right out of college, but time is on your side. That is important. Putting aside even small amounts regularly now could make the difference between living comfortably as you get older or constantly worrying over your finances.
“Remember that being frugal isn’t about being cheap or depriving yourself,” Stefanie O’Connell, the author of “The Broke and Beautiful Life,” said in an interview.
If learning how to save money sounds like it’s going to require some mental gymnastics, well, that’s no surprise. But there are tactics to help get you on your way.
50-30-20: A formula to build on
Before she was a U.S. senator, Elizabeth Warren popularized the idea of 50-30-20 budgeting. Here’s the concept, laid out in a book she wrote with her daughter, Amelia Warren Tyagi, “All Your Worth: The Ultimate Lifetime Money Plan”:
— 50 percent of your income after taxes goes to basic expenses (rent, utilities, groceries).
— 30 percent is for discretionary spending (vacations, a big night out).
— 20 percent is for saving or paying off debt.
This is a guideline. Depending on where you live, how much you earn and what your expenses are, putting 20 percent toward savings may be unrealistic. Maybe you can save more. If you need to adjust to fit your circumstances, that is OK. The point is, if there is a logic to your spending, it will feel good, not like a burden.
As important as saving is, it is unrealistic to expect you will never splurge. Even the 50-30-20 rules allows you to spend something on whatever you want. What is important is figuring out what that is.
Make a list of everything you enjoy spending money on. The things at the top of the list — books, say, or travel or dining out — are where you should focus discretionary spending.
Pay yourself first
If you put something aside as soon as you are paid — commit to the 20 before the 30 — you do not have it to spend. Personal finance experts call this paying yourself first. Need motivation? Establish a concrete purpose for your savings, whether short term (a trip to Japan) or more distant (a comfortable retirement).
One good way to enforce savings: Enroll in your employer’s 401(k) plan, if there is one. A percentage of your pay comes out of every check, before taxes. Some employers offer a 401(k) match: For every dollar you put in, they equal it up to a certain ceiling. This is free money. Get as much as you can.
Another way to pay yourself first is to create an automatic online transfer so that a portion of each paycheck goes to a savings account. It is a standard option with most banks. To set it up, just use the “transfer” tab on your bank’s website, call customer service or stop in at a branch.
Let your money make you more money
When the interest you earn on your savings also earns interest, that’s compound interest. The more often it happens, the more your savings will grow.
Of course, your gains in a savings account will be minuscule — you will be lucky to get 1 percent compounded annually — so the concept works most powerfully with an investment account like a 401(k). Here’s an example:
If a 22-year-old and a 32-year-old each put away the same amount of money every year ($5,000) and earn the same return on their investments (6 percent annually), by the time they hit 67, one will end up with nearly twice as much money as the other. Without doing anything else.
The 32-year-old will have saved about $557,000.
The 22-year-old will have saved more than $1.06 million.
Remember, investing is more complicated and riskier than simply putting money into a savings account. But if you invest sensibly, accept that the stock market rises and falls and stick to long-term goals, your investments will multiply over time.
Be a shrewd customer
Meeting your goals involves being smarter about spending, and not just by clipping coupons.
“I’m all about frugal strategies that take little time and maximize savings,” said Kyle James, founder of the deal site Rather-Be-Shopping.com.
For example: Cable and internet providers typically increase users’ monthly bills after an initial promotional period. When they do, try calling and seeking a better rate with this simple script: “I noticed you recently increased my rate. I’ve been a loyal customer. Can you offer a better deal?” The immediate answer will often be no, but if you politely threaten to switch providers, there is a decent chance you will be transferred to a different department, where you may get a better offer. And if you get your bill lowered, that is a year of savings from one (hopefully) brief call.
When you shop online, the Honey browser extension automatically searches for coupon codes, applying the codes that yield the biggest savings at checkout. Websites like Camelcamelcamel track price fluctuations at Amazon and other shopping sites. You can also get email notifications when an item you want falls below a certain price.
Daily deal sites and clearance racks invite impulse spending. Watch out for them. Another good rule to follow: Saving money does not always mean choosing the cheapest option. A more expensive shirt that lasts a long time may be a much better value than four cheaper shirts.
Avoid the ‘lifestyle inflation’ trap
Ideally, as your career unfolds, you will get promotions, raises and bonuses. When you do, you will be tempted to spend whatever added money you get on more expensive clothes, a costly vacation or other nonessentials. Don’t do it.
Instead, when you do get a raise, apply the same savings rules to it and put a portion aside. It is OK to spend some of that newfound money on something that has been out of reach. But if you can maintain your current lifestyle on a larger income, you’ll be able to save that much more. Remember: You’re saving now to live comfortably later on. Succumbing to “lifestyle inflation” won’t help you there.