3 June 2020

Savings Strategies for Young People

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For many young workers, it can seem like after rent, living expenses, student-loan or credit-card payments and incidentals, there’s little left over from their monthly take-home pay, making it difficult to establish and execute a savings plan. So how’s a 20-something to save? Here are some strategies for socking away cash on a tight budget:

Set goals. If you’re not sure where to start, begin tracking your spending. You might be surprised to see where your dollars are actually going.

When budgeting, keep in mind the 50-20-30 rule. 50% of your budget should go to fixed costs like rent, utilities and car payments; 20% toward financial goals like building an emergency fund, paying down credit-card debt and saving for retirement; and 30% toward flexible spending, i.e., variable costs such as groceries, entertainment or shopping.

Within the 20% for financial goals, prioritize setting aside at least one month’s net income in a separate savings account for emergencies like unforeseen medical expenses or the loss of your job. Next, work on paying down so-called “bad debt,” like high-interest credit-card debt, financial experts say.

Then, focus on retirement. If your employer offers a 401(k) or similar retirement-savings plan, be sure to take advantage of it by contributing. Ideally, you’d contribute enough to receive the company match, if one is offered, she says. But if that amount seems too steep at the moment, don’t wait—starting to save a little now is better than waiting.

And if your employer doesn’t offer a plan, consider opening a Roth individual retirement account—to which you contribute after-tax dollars—which will allow your contributions to grow tax-free until retirement.

Automate everything. Once you’ve set savings priorities, it’s time to execute—and automation is your friend. Set up your direct deposit so that a fixed amount goes directly from your paycheck into your retirement or savings account without ever hitting your checking account. That way, you’re paying yourself first, and you won’t be tempted to touch those funds.

Another option: Set up an automated recurring transfer from checking account to savings account (but not the other way around).

Self-audit. Think about all the various subscriptions you have to magazines and entertainment sites like Netflix, Hulu and Spotify—or even cable. Do you really use all of them?

Make a commitment to canceling at least two of your subscriptions. Each might only be a few dollars a month, but having a handful can add up quickly. And think of your decision as a trade-off for better financial health, rather than a sacrifice.

Know when to say no. Being social often involves eating and drinking—and if you’re doing that often, it adds up. Plan out your social calendar for the month, budgeting for events important to you, like drinks with colleagues or a friend’s birthday dinner. Then, when spontaneous events do arise, you can make active decisions about whether you should say yes to something that’s not already on that calendar.

Cash only. If you tend to overspend with your credit card, put yourself on an “all-cash” diet. Put away the credit card and carry with you in cash only what your budget allows, she says. That way, if you run out of cash, your spending spree is over by default.

Click here to access the full article on The Wall Street Journal. 

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