It’s hard to plan for the future but as the saying goes the only things certain in life are death or taxes. If you’re looking to save some money, first take a look at some of my tips to save money as a twenty-something by clicking through to my profile. Now that you’ve found some ways to save money, you might be wondering how to put that money to work beyond just leaving it in your checking account. Like the other articles in this series, I thought about my life, asked some friends and did some research on five great ways to save as a twenty-something.
Where to save #1- Saving for a rainy day. My twenty-nine year-old friend bemoans the paltry interest rates on savings accounts but as a father-to-be, he wants to leave his money liquid (easy to get) which is why he had been keeping it in a checking account. He’s afraid that he’s forgotten to buy things, the upcoming medical expenses and he wants to hold on to some money to start a college fund for the child once born. So the twenty-nine year-old worried parent-to-be took to the internet and found on money-rates.com that smartypig.com offered a guaranteed 1% interest rate. While he still is frustrated with his low return, it’s nearly 5x better than he had been getting from his local bank and he feels that the hassle involved with moving the money was definitely worth the extra cha-ching.
Where to save #2- retirement. Yes, I know it’s hard to think about your life ten, twenty, thirty, even forty-plus years from now but for twenty-something’s thinking about retirement, take a look at your employer’s 401(k) program. Named for the applicable section of the IRS tax code, this program is required to have investment soundness (i.e. the company you work for has to assess the risk and expense profile of the choices being offered to its employees) and is a very easy way to save some money. Firstly, many employers offer a match of some portion of your salary for those investing in the plan, secondly, there are protections and ways to borrow from the plan if any unexpected things arise. My employer matches my contributions with a contribution of 3% of my salary- my recommendation is to definitely take any free money that you’re entitled to. You might also consider a self-directed IRA if your employer doesn’t offer a 401(k) plan and/or match your contributions.
Where to save #3- kid’s college. My twenty-nine year-old father to be is getting picked on again. When his child is born, he wants to start saving for her college right away. When he started researching options he found out about New York State’s 529 plan which allows for qualified contributions to grow tax free for college. And if the first child becomes a basketball star who gets a full-ride to Yale, no need to worry, that money can be rolled over for another child, niece or friend’s child.
Where to save #4- real estate. Admittedly, this decision will lighten your checking account quite a bit but over time it could save a lot of money or earn you a lot of money. My twenty-six year old IT-consultant friend bought his house with his wife. Not that buying a house is always a money-making proposition – he calculated using an awesome Excel workbook that even if the property value doesn’t increase and considering all the closing costs on the house, he would still be better off buying than renting in about 4-5 years.
Where to save #5- general investing. Investing in stocks is probably an alternative you’ve heard of for growing your checking account. My twenty-four year-old friend doesn’t have time to sit and research stocks so she puts her money in an index fund which tracks the Dow Jones Industrial Average performance. Index funds tend to have lower fees than actively managed mutual funds and typically perform along with the market which returned over 20% last year. She invests using Sharebuilder because the fees are fairly low and there is no cost to carry an account and good customer service.
There are many ways to save smart in your twenties and your checking account is probably not it. Still the above is certainly not an exhaustive list. Do some research or comment below and tell the other readers, how do you save?
This article is second in a series of “Five Ways for Twenty-somethings to Save” for other articles in this series, please click my name and scroll down to find the next article.