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Question: I’m headed off into the real world all too soon, and I’m getting an early start on something that I’m sure is a staple of adult life: worrying about money! The jobs I’m applying to don’t offer the sorts of salaries that people can make in, say, finance, and I’m worried that my lower income will keep me from saving enough. Early on in my career, I think I’ll have to spend on the essentials and get myself set up in life, so I’ll probably put off saving for the immediate future–but I’ve been told that’s a terrible idea, so now I’m turning to the experts. Is it really that important to start saving now as opposed to, for instance, in five years? Why? And if it is so important, how can I pull it off?
Answer: Failing to save for a short period of time isn’t the end of the world and won’t keep you from retiring comfortably. But it’s true that a dollar saved early in your career is better than a dollar saved late, so you should strive your best to put as much as you can away from the start.
The reason that saving early matters so much is interest. When you keep money in a checking account at a bank or a credit union, it earns minimal interest–essentially, you’re just keeping money in a safe spot while being able to spend it. That’s important, but it won’t help you grow wealth, which is why the bankers at ASI Federal Credit Union recommend that savings beyond a basic checking balance and emergency fund should be held in a savings account, where interest rates are higher.
When your money gains interest, your nest egg grows bigger. And the principle of compound interest explains why this means early savings beat later ones. Compound interest simply refers to the fact that interest gained is added to the principal. Make 5% interest on $100 one year, and you’ll be calculating next year’s interest on a principal of $105, not $100. As the years roll by, this effect is magnified, with each year’s gains building on the next. This is why experts say that a dollar saved in your 20s is worth 10 dollars saved in your 50s.
And what works well in savings accounts, say advisors at Troy, Michigan’s Zhang Financial, can work even better with investments like stocks and bonds, which can often reap more interest than the rates offered by banks and credit unions.
So saving early and often is vital to building serious wealth–but how can you do that right out of college on a relatively modest salary? It’s not always going to be possible, but there are things you can do to make saving more feasible.
Experts recommend “paying yourself first”–treating your savings like a bill that must be paid before you can go out and have fun. You may also want to take a closer look at those “essentials” you say you have to buy: remember that the lifestyle of your parents and their peers is the result of decades of work, and that there’s no shame in living a bit more modestly in the near-term. Good luck!
“A simple fact that is hard to learn is that the time to save money is when you have some.” — Joe Moore