By Ellen Sheng
You’ve got your best friend’s wedding coming up, rent, student loans, car payments...who has the money to invest for retirement after all that?
Saving for the future can seem like a tall order considering that the average American has about $15,000 in credit card debt and doesn’t have the funds to cover a $400 emergency. The trouble isn’t so much that people don’t know they need to save money. It’s just that more pressing expenses often take precedence.
But there is a way to change this: Build saving into your budget.
“Typically, what I hear is, ‘well, after I pay the rent, and after I pay for the car, and after I go out every Thursday, Friday, Saturday. I don't have money left,’” says Sallie Krawcheck, CEO and co-founder of Ellevest, a digital financial advisory for women.
The problem with this approach, Krawcheck explains, is that you’re leaving savings until the end. To guarantee you have some savings every month, take it out of your paycheck first, before you get a chance to spend it.
But it may seem like you can't afford to take savings out first. Many people face competing demands, like paying off credit card debt or student loans versus investing for retirement. There are a few ways to approach this dilemma. First, take a look at the interest rate, or APR, you’re paying on your debt. Credit cards tend to have double-digit interest rates, so if you have a ton of credit card debt, yes, you should pay that off first before trying to build up your savings. (FYI, if your credit card balance stays around $10,000 and you have an interest rate of 20 percent, you're spending $2,000 a year in interest.) Just don’t delay for too long.
With student loan debt, which has lower interest rates, you could likely make those payments while also putting something aside for retirement. It doesn’t matter if you can’t save a lot from each paycheck. If you invest $35 a week over 20 years, you could end up with $62,386 (assuming it grows about 6 percent a year, a conservative estimate).
The first step is to figure out how much you can realistically stash away—even if it's a teeny amount. Start by creating a budget; the 50/30/20 rule is a good one: 50 percent of your take-home pay goes to essentials, like rent, car, utilities, and insurance, then 30 percent for current, variable needs such as paying off debt, groceries and dining out, or trips. Then the last 20 percent is for future you. That could be retirement, putting aside funds to start a business, or building a rainy day fund.
Of course, this model will vary depending on your income and where you live. The point is to try to set something—anything—aside for the future. “If you can't put aside 20 percent to future you, then put aside 2 percent. Next year, try to move it up to 3 percent. Really conceptualize future you. If you're doing nice things for yourself today, are you doing bad things for future you?” posits Krawcheck.
You honestly don't have to start with a lot. With as little as $1, you can start investing in exchange traded funds, or ETFs, funds that hold a lot of different stocks, bonds, or commodities in one portfolio. Which type of account is right for you depends on your goals and income. (More on that here.)
“The earlier people can try to identify longer term goals, the better perspective they will have in terms of balancing spending today versus saving for the future. Once you start thinking 20 years out, the picture becomes different. Saving is your spending for the future,” says Jill Fopiano, president and CEO of O’Brien Wealth Partners in Boston.
Financial advisors agree that saving as much as possible, as early as possible is the best thing you can do for your future finances. Putting that money aside now, instead of 10 years from now, makes a real difference. If you put off investing, you lose the power of compounding interest. On average, a diversified portfolio of stocks and bonds should be able to make about 6 percent to 7 percent a year, advisors say. But if you invest a decade later, not only would you be 10 years behind schedule, but you’d also miss out on all the money you would have made during that time.
For women, saving as much as possible as early as possible is even more important considering that women are more likely to take time off from the workforce to care for children or aging parents. Women’s salaries also, on average, peak earlier than men’s. Investing won’t fix the wage gap, but getting on top on your savings and investments can help put you on sounder financial footing.
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