Since April is financial literacy month, I wanted to put together a series of articles designed to prevent you from falling into common financial traps I see all the time. Young professionals often feel like they don’t need to work with an advisor because they don’t have money to manage in an investment account. Good financial advisors provide a lot more services than just investment advice. We work on behavioral changes that get you working towards more financial freedom in your life. It can really be more like financial coaching or financial therapy. Building good habits now will put you on an excellent financial footing later.
This first article in the series takes a look at savings habits and provides some great tips for prioritizing your savings efforts.
Stop Saying “I Know I Should” and Save More
Young professionals often “spend into” salary raises and bonuses and do not prioritize saving to the extent they should. Most of the people I talk to know they SHOULD be saving more, but there’s a common feeling that there will always be more time to save and catch up. For those in their 20s, I hear “saving will be a priority, later, in my 30s.” For those who are in their 30’s I hear, “I know I should be saving for retirement, but things haven’t worked out like I planned, I’ll focus on it later.”
Life always comes up. In our 20s, 30s, and 40s there are tons of life changes that can derail our intention to save more. Some examples include job changes/moves, spending time abroad (whether for travel or work), building a marriage and family, job loss, or leaving jobs which aren’t productive or positive. Really anything can happen, but a priority on saving should be a part of your planning every step of the way. Sitting down to prioritize the goals you have for yourself which may include travel, buying a house, switching jobs, or a big move across country will make it so much easier to plan and save for those unexpected things that come up. The unexpected is what has prevented you from saving in the first place, I’m going to teach you how to fix that.
The solution is to prioritize savings based on the goals and values you have set for your life. Wealth creation begins (and keeps growing) when we save more than we spend. The more you do it, the more flexibility you have now as well as in retirement. It’s as simple as that. You may ask, “how can I do that when all those things you just listed are happening to me?” Start by making a plan and writing down your specific goals. How much does each one cost? How long would it take to achieve with your current savings rates? Getting this down on paper will help you be more prepared to make a decision when the unexpected comes up. You’ll also have the flexibility to make adjustments by re-prioritizing when needed.
Here are Some Actionable Steps
First prioritize getting an emergency fund. It’s should be held in a high yield savings account and be there for you for 3-6 months if you have to leave your job unexpectedly or want to pursue a special opportunity across the country or across the world. You should prioritize this even over paying down debts, it’s really important.
Then make sure you’re putting away funds for retirement at every job you have. If you’re not offered a retirement vehicle at work, contribute to an IRA. By the age of 30 you should have one year’s worth of salary put away towards retirement, and by 40 close to three times your salary. The earlier you save the more it grows! That’s the beauty of compound interest.
Here’s a good example to illustrate why saving early and often is smart: $1,000 dollars saved in your 20s will be worth over $21,000 by retirement. However, $1,000 saved in your 30s will only be worth $10,000 at retirement. Just make sure it’s actually invested in something other than “cash reserves” so it can outgrow inflation — this is problem area #2 that we will explore next week.
Once you get to a point where you’re saving regularly for retirement you can start saving more for your other goals and priorities that you’ve set for yourself. Dream big! And revisit your goals often to make sure they are still relevant for you.
If you’re guilty of saying “I should save more” or you’re not yet able to meet all the rules I mentioned above, don’t fret. There’s time to get you back on track. My advice is to start by getting your goals on paper. Sometimes this is all the motivation we need to spur us into action.
Hopefully this inspired you to think more about your savings strategy (or get one if you don’t have it). I’m always open to hearing about other strategies that might motivate you to save more — so drop me a line if you have ideas! Stay tuned next week for Problem Area #2 – Not making your money work for you.