PERSONAL FINANCE

Winning Plays for Saving While You're Young

Saving is not just about retirement. It's about creating a plan to help finance your dreams–big ones like selling your home and retiring on a yacht in the South of France, but also shorter-term aspirations like adopting a pet or buying your first car. Regardless of your age, retire the notion that it is still too early to save, and start saving early so you will have the freedom to enjoy your future in style.

Americans today are living longer, healthier lives. Since 1965, the average American's life expectancy has increased by almost 10 years. However, instead of saving more money to prepare for a longer life, personal savings rates in the U.S. have dropped from around 12% during the 1970s to 6.2% in 2019 ¹.

Why is it so important to start saving early?

Here's the deal. Over time, your money can benefit significantly from something called "compound interest." Compounding is the process of earning interest on your interest. For example, when you first open a savings account, your initial deposit grows by the percentage you earn in interest annually; the next year, however, you will earn interest on the original amount you put in as well as the interest you earned last year. It may not seem like much at first, but over time it adds up.

The chart below demonstrates the magic of compound interest. Bob is only saving $600 a month, but by getting a head start, he ends up with more than double Sally's savings at retirement (despite her best efforts to make up for her late bloomer status by saving more every month).

This example is for illustrative purposes only. Increase in inflation is not factored in. Individual's results will vary.

Even if you're putting away a portion of your income every month, it's important to make sure that you're maximizing the potential future value of these savings. Here are some Winning Plays to save smarter:

1.Start early. Take advantage of compound interest so that you can enjoy the fruits of your labor in the future.

2.Set clear goals. It's a lot easier to save when you know what you're saving for. Get specific about your goals as well as any upcoming expenses or life milestones and calculate how much you will need to save within what time horizon.

3.Pay off your debts. While you should never compromise your ability to cover day-to-day expenses, debt is expensive and has a way of overstaying its welcome. Focus on eliminating high-interest debt first, which is typically comprised of credit card or store card debt. While it is important to pay off lower-interest debt, such as student loans, don't sacrifice building up personal savings in case of an emergency.

4.Automate your savings. People have a tendency to spend what they have. Treat your savings as an additional expense and set up an automatic deposit to transfer a percentage of your income to your savings account each month. Some employers allow you to do this through payroll, but you can easily set this up via your online banking account.

5.Take advantage of tax-deferred accounts. If your employer offers a 401(k), consider it as an opportunity to build long-term wealth. If this option is not available to you, consider alternative types of accounts to save such as a Traditional IRA or 529 plan.

6.Master the art of saying "no". One of the biggest obstacles to overcome when trying to remain disciplined about your saving strategy is FOMO or "Fear Of Missing Out." This doesn't just apply to exotic trips and dinners with friends, but can also relate to saying "not right now" to that pair of shoes you've had in your virtual shopping cart for the past two weeks. If you find yourself feeling tempted, turn to your savings goals for inspiration.

7.Don't forget to treat yourself. When it comes to saving, recognize what small expenses give you the most pleasure and allow yourself to enjoy these in moderation. These occasional rewards can help keep you motivated as you build healthy money habits.

8.Save on taxes. Make sure you educate yourself about any tax deductions you may be eligible for. If you're in grad school, you may be eligible for an education credit or certain deductions. Similarly, if you are self-employed, you may be able to deduct expenses related to transportation, health insurance, a home office, and any client-related activities.

Practicing sound saving habits can help provide you with the option to pursue more, experience more, and achieve more because you have the financial foundation and flexibility to do so.