While We're Young
In this day and age of social media, saving money for your future won’t get you many likes. Advice often heard - urging you not go out this weekend or to skip the Starbucks line tomorrow morning - can only be written so many times. But, taking a hard look at your personal finances can go a long way.
While everyone's financial situation is different, a good place to start is with the old 50-30-20 rule. This goes as follows: 50 percent of your income toward necessities, like housing and bills. Twenty percent toward financial goals, like paying off debt or saving for retirement. Finally, thirty percent of your income allocated to wants, like dining or entertainment.
If you are struggling to fill up that 20% savings bucket or putting it off, I'll often refer to the illustration below comparing saving early vs. waiting and trying to catch up. Showing the power of compounding investments overtime.
Starting at age 30 and contributing $12,000 each year for 10 years and stopping at age 40, with a 7% average return
or
Waiting until you are 40 and then start saving $12,000 per year for 26 years until age 65, with a 7% average return.
Intuitively, we all understand the concept of compounding interest and the benefits of saving early. But this graph still eye opening to me. A total of $120,000 saved over 10 years will have a higher value than saving almost 3 times that over 26 years with the equal growth rate assumptions.
Don't get me wrong, saving is hard. Especially when you are young and earning less. But a little does go a long way.
One thing that I do that helps me fill up my savings bucket is to think of it as a fixed cost - just like your rent/mortgage. Take advantage automation with your 401(k) and other savings contributions each month so you don't give yourself the chance to spend them. If you are unsure of the best way start saving, get advice from an investment professional.
Everyone has their own way that works for them, so find what works best for you. Enjoy your younger years, spend time with friends, and get out of town every once in a while. Also, refer to the illustration above when you are considering delaying saving for retirement - future you will be glad you did.