Six Secrets to Saving Money When You Are Young

By Staff

Photo courtesy of lrargerich

While perusing a few of my favorite personal finance blogs over the weekend I ran across an article last week from All Financial Matters, One Reader’s Reasoning On Why Younger People Don’t Save.  I like the way JLP addressed each concern raised by the commenter, whose attitude reminded me a bit of myself at that stage in life.

I went away to school and came back with a credit card and small pile of student loan debt, but no degree.  I thought I was pretty financially savvy, so almost immediately after starting a new job I signed up for their 401(k) plan, employee stock purchase plan, and even a Roth IRA.  I started socking money away and felt pretty good about myself. The problem was I wasn’t addressing the debts I had accumulated earlier while away at college.  I was paying minimum payments and continuing to use the credit card to finance life’s luxuries–vacations, new clothes, baby furniture, etc.  I was eager to start saving, and neglectful in repaying debt, and controlling spending.

Eventually, it caught up with me and by my late twenties I realized I had to address the debt or I would continue running on this financial hamster wheel for the rest of my life.  I halted my Roth IRA contributions, temporarily, and dropped back on my 401(k) contributions.  I also suspended my employee stock purchase plan because that money could be better spent repaying debt, and because the idea of not being diversified began to bother me as the company I worked for developed serious issues.

Looking back I realize now that I was smart to start saving early, but I jumped in with both feet, when I was really only ready to get my big toe wet.  So heads up young friends, here are a six secrets to save money when you are just starting out:

  • Try to save half of your income.  If you are at a stage in your life where you don’t have kids to care for, and haven’t accumulated much debt yet, you may be able to pull of saving half of your income.  If you can do this, you are essentially buying yourself one month of early retirement each month you adhere to this plan.
  • When it comes to savings, no amount is too small. If you are like most of us, and are not able to save half of your income, just start saving something.  You might think saving a measly $20 a paycheck, or $50 a month is not worth it.  Not true.  In fact, consistent savings is a sure-fire way to build a small emergency fund that will keep you away from the financial edge early on.
  • Establish a comfortable style of living early, and keep it that way.  It doesn’t matter how much you save if you constantly increase your style of living.  A new car every four years, and a housing upgrade every seven, will not put you on the fast track to building significant wealth.  The best way to save money when you are young is to keep expenses as low as possible, for as long as possible, and stash away every bit of savings you can.
  • Stay away from malls, televisions and catalogs.  All three are designed with one objective–to separate you from your money.  And it isn’t just advertisers that do it.  Peer pressure has forced many otherwise financially savvy people into bankruptcy.  When we see others on television driving nicer cars, wearing nicer clothes, and living in nicer homes, it is natural to be a little envious.  Hollywood sets an unrealistic expectation of how things work in the “real world,” so don’t buy into the hype.
  • Ignore what others think.  Talk about feeling like you are on an island!  Just wait until fellow graduates and friends hear about your one-bedroom apartment within biking distance of your new job.  Are you nuts?  You have a college degree!  It’s time to buy that big house in the suburbs, or that upscale condo downtown, and finally upgrade that beater you’ve been driving throughout school.  Ignore this advice.  Develop some thick skin, and stick to your plan.  In a few years, you will be the one laughing–all the way to the bank!
  • Move slowly.  While it is important to get an early jump on investing, only do so when you are on solid financial footing.  Also wait until you have a full understanding of the investment vehicle and the various options.  Don’t start a Roth IRA because it just sounds sexy.  Don’t put all of your 401(k) money in international equities because your boss’s “investment guy” said it was a smart move.  Only move on to the next step when you think it is a smart move.

The most important step in saving money when you are young is to simply start.  I recommend opening a high-yield savings account with ING Direct today!