How to Save When You’re Young


In 1995 when I wanted to make a cross-country move, I quit a full-time job and took my 401k funds with me. Bad choice. By cashing out the account, I stole a huge opportunity from myself to earn decades of compound interest and lay the foundation for a comfortable retirement.

Hindsight is, of course, 20/20. The key takeaway is a real kicker. Had I left the funds alone, my $6,000 balance would have grown to about $32,000 today (after 21 years) without a single additional dollar in contributions. Since I’m still 25 years from retirement, I could have watched the account grow to nearly $235,000. If I had let it grow for a full 50 years, I could be looking at $324,000. All from $6,000 in a Fidelity target retirement fund.

Here’s what I learned.

The beauty of saving

It’s hard to feel the urgency of putting money aside for the future when we’re young. I fully expected that I’d always be employed and building a nest egg. The $6,000 seemed insignificant in the context of retirement. Experts say we need a million bucks to comfortably retire, so why would being a few thousand short matter? I couldn’t comprehend what a difference time makes.

The most important thing to know about compounding interest is this:

For 20-somethings, time is far more valuable than dollars.

Make no mistake. The absolute best thing you can do for your future financial well-being is start squirreling away small amounts of money now, and let it sit there.

The other obviously important benefit of having money in the bank is that it can soften life’s punches. The car breaks down. Your iPhone is stolen. You dump coffee on your laptop. A travel opportunity presents itself. You hate your job and want to walk the wilderness for a few weeks. Situations like these are easily handled with money, and difficult to resolve without it.

How to save money when you’re young

It’s important to save money. You get that. But how? Even with an understanding of how investments work, it is hard to save if you don’t have much to start with.

  1. Get a handle on your budget. You need to know where and how your money is spent. Use a budgeting app that tracks each transaction, like Mint, You Need a Budget or Wally.

Some apps, like Mvelopes and Good Budget help you set spending limits for each category. Others send congratulations when you reach a goal. These are just a few of many good app options. Play around with them. Find one that works for you.

  1. Take free money (and stop giving yours away). This one is really not as hard as it might seem.

My bank was charging me $12 per month for a checking account. Although the fee was waived for people who have at least $500 in direct deposits, I’m self-employed. My pay comes by snail mail. They wouldn’t waive the fee for me, so I switched to a credit union that offers free checking accounts and now keep that $144 per year for myself.

Enroll in a Flexible Savings Account plan to get a discount on eligible purchases equal to whatever your tax bracket is. If your taxable income for 2015 falls between $9,226 and $37,450, you’re in the 15% tax bracket. When you pay $100 for a transit pass and use pre-tax money, you’ll save $15 because you won’t pay taxes on that $100. Your pass, in effect, costs just $85. The list of eligible FSA purchases is long and varied, and includes things like contact lenses and solution, acupuncture and sunscreen (SPF 30 and higher).

Self-employed with no access to an FSA? Enroll in a high-deductible health plan and open a Health Savings Account. High deductible health plans (HDHPs) scare people, but a healthy individual will pay far less out-of-pocket during the year on an HDHP than on a plan with higher premiums and cheaper co-pays. Then you can keep the difference in an investment account that belongs to you alone. You’ll need more healthcare funds later in life, and the HSA can grow until then (because of compounding interest!). HSA accounts are unique in that they are funded with pre-tax dollars now, and withdrawn tax-free for eligible expenses later.

  1. Automate savings. Set up an automatic transfer from every paycheck into your savings account. If retirement is the goal, up your paycheck contributions one percent every quarter until you reach at least ten percent (twelve or more if you’re ambitious).

For other savings goals, if adding a dollar here and there hurts less than forking over a larger amount once a month, use Digit, an app that automatically makes small, frequent transfers into a savings account.

  1. Pre-pay for wants. Don’t go into debt for a vacation. Delay the trip for a year and pay it off first. You’ll enjoy yourself much more if you do. Really. Academic studies prove it. The happiness you derive from the experience will also be enhanced by the time you spend looking forward to it.

Get into the habit of never charging something you don’t already have the money to pay for. When we carry a balance, we develop a “heck with it” attitude. It becomes easier to continue to carry a balance, and to carry a bigger balance than before. Avoid that downward spiral.

Paying off debt? Use Ready for Zero, a free app that provides debt payoff plans and plenty of encouragement along the way.

  1. Make sacrifices. But don’t make yourself miserable. Do you love your latte? Keep it. Saving money isn’t about punishing yourself. It’s about identifying waste in your budget and sacrifices that you’re willing to make.

Look for automatic subscription and membership renewals that you no longer need. If you’re not going to the gym, cancel it. Get into the habit of walking or running three times a week before you sign up again. Curb your meal budget. Eat peanut butter sandwiches for lunch. If you don’t know what or how to cook for dinner, try a meal delivery service like Green Chef or Blue Apron. Most single people say they can get eight meals out of the six that are delivered each week, and it’s fun to cook them. If you’ve prepaid for a box of meals, you’ll probably be less likely to go out to eat. Cut your nighttime spending. Have a cocktail or two at home before you hit the clubs.

  1. Get creative. Do you receive holiday and birthday gifts from your parents? Ask for cash deposits to your savings instead. Is your closet overstuffed? Sell some things. Got spare time? Find a way to moonlight for extra money. This is where you need to consider your own skills and opportunities. If you babysat in high school or college, put yourself on again now. I knew a guy who played guitar on a crowded downtown street corner on Friday nights for tips. He made an extra $200 or more per month, cash.

Where to save money

Where you put your money depends on what it’s for.

For an emergency fund, keep your money in a savings or money market account. Try an online bank where interest rates are usually higher. Rates are very, very low so you won’t see big interest earnings early on. Remember, the real value is in the number of years you let the money grow. Get the best deal you can find. It’s your money.

Longer-term savers can bump up their earnings by opening a Certificate of Deposit account.

If your goal is retirement, put the money directly into a 401k or IRA.

Don’t keep the money at home. First, you risk loss or theft. Second, you lose out on interest earnings, no matter how small, and you lose the value of compounded interest over time.

What it all boils down to

If you’re not far from your parents’ nest all of this may seem complicated or overwhelming. I promise, within a short time it won’t. We all need to learn about money, know how we spend, know our goals, understand how much things cost. No one will protect your money the way you will, so there’s no better time to start.


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