Key takeaways
- Over half of Americans have less than $1,000 in savings.
- Waiting just a few years to start investing could cost you hundreds of thousands in lost earnings.
- Saving even while paying off debt can help you establish a fund to cover emergencies.
A 2017 survey by GoBankingRates found that over half of Americans have less than $1,000 in savings. Among millennials age 25 to 34, 41% have absolutely nothing saved. Zero dollars.
There are many reasons for such low savings rates. Low starting salaries and high student loan debt cause many to live paycheck to paycheck. But often a paycheck to paycheck existence can be blamed partly on poor spending and saving habits that spring from a lack of knowledge about money management and investing basics. If you can get smarter about money and change those habits, you’ll be able to break out of debt and build wealth for the future.
Let’s look at a few of the common reasons young adults give for not saving and investing, and how that can be turned around.
“I’ve got plenty of time. I’ll start saving in a few years.”
The fact is, the longer you wait, the more earnings you sacrifice. Bill DeShurko, a financial advisor and author of “The Naked Truth About Your Money,” notes that by starting immediately, you can take full advantage of the power of compound interest. “With it, interest is calculated not only on the deposits you make but also on the accumulated interest from prior periods.” To illustrate, he cites the example of two investors:
1. Jane started investing $200 a month at age 25 until age 34, for a total savings of $24,000. She didn’t save another dime and let her money sit and grow at a rate of 6% per year. At age 65 Jane’s account had grown to $398,309.*
2. John postponed investing until age 35, at which point he began to set aside $200 a month until age 65. Though his contributions totaled $72,000, John’s account grew to just $200,909 at age 65. By waiting 10 years to invest, John saved three times as much as Jane and still ended up with just half as much for his retirement.*
Turn it around: Start today, even if you only have $25 per paycheck.
“I can’t afford to save. I’ve got too much debt”
A more accurate statement may be, “You can’t afford NOT to save.”
A common question is whether it’s best to pay off debt before investing. The answer, says DeShurko, is to do both simultaneously. “Even if you have debt, start putting $100 a month into a low-risk investment, such as a credit union money market account,” he urges. In exchange for paying some finance charges to your creditors, you establish a powerful savings habit and accrue funds for emergencies and life’s pleasures.
As you’re investing, though, don’t ignore your debt, warns Lucy Duni, vice president of consumer education at TrueCredit.com by TransUnion. “Keeping your [credit] score intact can be as easy as paying your bills on time, even if it’s just the minimum payment,” assures Duni. If your investment plans include buying property and financing a mortgage, this is a particularly significant point.
Turn it around: Adjust your spending to free up enough extra cash to jump on the savings train. Start slowly and build up your savings habit gradually.
“I just don’t have the discipline to put money aside.”
Turn it around: Take advantage of automatic deposit programs for built-in savings discipline. One of the best aspects of a workplace 403(b) plan is your contributions come out of your paycheck before you have a chance to spend the money. “Automatic savings is the best way to build wealth,” promises certified financial planner Jon Clark, a former teacher and NEA member.
Arrange a similar program with your bank or credit union for your other financial goals. Total all your monthly expenses, and then subtract that amount from your net monthly income. Have the remaining sum regularly deducted from your checking account and deposited into savings. Not much (or any) left over? Either decrease unnecessary expenses or augment your income to generate extra cash.
“I’m afraid I’ll invest at the wrong time—when prices are high.”
Turn it around: Take advantage of dollar cost averaging. Another advantage of an automatic investing program is you invest the same amount every month regardless of how your investments or the markets are doing. This steady, consistent investing is called dollar cost averaging. “It’s an incredibly efficient method,” assures Henry Montag, a certified financial planner with a long history of helping teachers invest. “It greatly reduces risk, since when the price is lower, you automatically purchase more shares. When the price is higher, you purchase fewer shares.” Over time, your dollar costs average out, eliminating any concerns about timing your investment purchases.
“I need someone to tell me what to do.”
Turn it around: Get some help from a financial planner. “Successful investing and financial planning is really more about avoiding mistakes than making brilliant decisions,” says DeShurko. If you’re concerned about the cost, consider that people who work with a financial advisor tend to get better investment returns—as much as 3% more on average, according to research done by Vanguard Group. Higher returns could more than make up for advisor costs.
Contact your retirement plan representative to see if there are any advice services offered. Or ask friends and colleagues for referrals. You can search for financial advisors in your area at The National Association of Personal Financial Advisors (NAPFA), a leading professional association of Fee-Only Certified Financial Planners. Also visit the Financial Planning Association and the Certified Financial Planner Board of Standards for more information and to search for candidates.
“I don't have the confidence or knowledge to make good money decisions.”
Turn it around: Make a commitment to educate yourself. Good money management and investing basics are not subjects taught in school. Many people enter the workforce without a clue about how to budget, save and invest. Read quality financial publications and websites such as the Financial Times, The Motley Fool, Forbes and Kiplinger. The more you learn, the more comfortable and confident you’ll feel about making decisions. The savings and investing habits you form when you’re young will stay with you for a lifetime.
*Investment growth projections are hypothetical and for illustrative purposes only. Your results may be higher or lower. Growth assumes an average annual total return of 6% compounded monthly with all earnings reinvested in a tax-deferred account. Taxes would be owed on any withdrawals.
