Q: I’m a young professional with a great job, making good money. But I spend my money as fast as I earn it. Part of me says, “You’re in your 20s, now’s the time to have fun and splurge.” The other part of me says, “You should really be saving something…anything.” Is there some magic formula for someone my age?
It is great to recognize the need to save while you are just starting out. Time is definitely on your side and your 20s is a great time to get on the right financial track for a secure financial future. The younger you start saving the more your interest will have time to compound, meaning your interest will be earning interest, so in addition to you working for your money, your money will be working for you!
The balance between how much to spend and how much to save is always tricky, and you will likely wrestle with this question throughout your life. There is definitely something to be said for living life for today, but that needs an asterisk next to it that says, *after you have put away some for the future.
I have found the best way to do this is to create different savings accounts (or buckets, as I like to think of them). Most experts recommend that you get to a point of saving 15 percent of what you are earning. You might not be able to start there but you will want to make that your goal within a couple of years. This 15 percent should be saved in a 401k and/or employer retirement plan and an IRA.
Then create savings accounts with different names. For example: “emergency savings (unexpected expenses come out of here), longer term expenses (such as a new car), travel, etc., and put so much each month into each. Online and mobile banking make doing this really simple after each payday.
Also have a checking or savings account that is for you to spend on life–doing the things you want to do day to day. With the longer and shorter-term savings put away each month you are free to spend the rest as you’d like and not feel guilty about it. Take that part and live for today!
You may find you have even more fun when you are secure in the knowledge that you are making good money choices.
Q: Do you have tips to make saving more fun for me and my family?
Absolutely! Here are a few of my favorites.
- Name your savings accounts. The “buckets” I mentioned above make great names to help you feel motivated. Depositing to “emergency savings” feels good. And I find depositing to my “travel” account is fun.
- Try to win your own mind game. I’ve played “See how many miles I can put on my car” and “Go one season without buying clothes.” Have fun making up your own and suddenly saving is a fun challenge.
- Don’t overspend on vacation. We tell the kids they have a set amount for spending as they’d like, and what they don’t spend they’ll get in cash after the trip. Invariably, they limit spending and asking, and we don’t overspend.
- Skip and save $200 or more. Over two months, skip one haircut, one nail appointment, one premium coffee, one lunch date and one dinner out.
- Switch to Save. Can you refinance a car loan or mortgage and save? Could you choose a different internet or mobile package? Take the time to see if you are getting the best value.
These tips only work if you put the savings into your account—you know, the one you named!