Many people starting out in their careers find themselves burdened with lots of debt (perhaps from student loans, credit cards and car loans) and very little savings for future needs. But there are simple strategies for gradually building small savings or investments into large sums, even during your school years, and often with the help of automated services that make it easy. Here are key examples.
- Save for specific goals. You should have a savings plan for large future expenses that you anticipate — perhaps education costs, a home or car purchase, starting a small business, or preparing for retirement (even though that may be many years away). And, young adults just starting to be responsible for their own expenses should build up an “emergency” fund that would cover at least six months of living expenses to help get through a difficult time, such as a job loss, major car repairs or unexpected medical expenses not covered by insurance.
- Commit to saving money regularly. This is important for everyone, but especially if you are supporting yourself financially. Even if you don’t make a big salary or have a steady source of income, the combination of consistently adding to savings and the compounding of interest can bring dramatic results over time.
Aim to save a minimum of 10 percent of any money you earn or otherwise receive. Putting aside a designated amount is known as “paying yourself first,” because you are saving before you’re tempted to spend.
- Put your savings on auto-pilot. Make saving money quick and easy by having your employer direct-deposit part of your paycheck into a federally insured savings account. Your employer or your financial institution may be able to set this up for you. If you don’t yet have a steady job, you can still set up regular transfers into a savings account.
- Make use of tax-advantaged retirement accounts and matching funds. Look into all your retirement savings options at work, which may come with matching contributions from your employer.“Chances are your retirement savings will hardly reduce your take-home pay because of what you’ll save in income taxes, and the sooner you start in your career, the more you can take advantage of compound growth.
If you’ve contributed the maximum at work or if your employer doesn’t have a retirement savings program, consider establishing your own IRA (Individual Retirement Account) with a financial institution or investment firm and make regular transfers into it. Remember that you can set up an automatic transfer from a checking account into savings or investments for retirement or any purpose.
- Decide where to keep the money intended for certain purposes. For example:
Consider keeping emergency savings in a separate federally insured savings account instead of a checking account so that you can better resist the urge to raid the funds for everyday expenses. Be sure to develop a plan to replenish any withdrawals from your emergency fund.
For large purchases you hope to make years from now, consider certificates of deposit and U.S. Savings Bonds, which generally earn more in interest than a basic savings account because you agree to keep the funds untouched for a minimum period of time.
For other long-term savings, including retirement savings, young adults may want to consider supplementing their insured deposits with low-fee, diversified mutual funds (a professionally managed mix of stocks, bonds and so on) or similar investments that are not deposits and are not insured against loss by the FDIC. With non-deposit investments, you assume the risk of loss for the opportunity to have a higher rate of return over many years.
For future college expenses, look into “529 plans,” which provide an easy way to save for college expenses and may offer tax benefits.
For healthcare, find out whether you are eligible for a “health savings account,” a tax-advantaged way for people enrolled in high-deductible health insurance plans to save for medical expenses.
- Think about ways to cut your expenses and add more to savings. For your financial services, research lower-cost checking accounts at your bank and some competitors. And if you are paying interest on credit cards or fees for spending more money than you have available in your checking account, develop a plan to stop. More broadly, look at your monthly expenses for everything from food to phones and think about ways to save.