A savings account?  No… I don’t have a savings account—or at least there’s nothing in it.  I live paycheck to paycheck (or for some of us, allowance to allowance), I have a pile of student loans, I don’t even have one extra dollar at the end of each month.  How am I going to save?  And why should I care?  Shannah’s back and we’re going to attempt to explain exactly why and how and everything else you need to know about savings.

Kate: Why is savings the most overlooked money fundamental with young adults?

Shannah:  We simply have too much to spend our money on: nice cars, fantastic trips, a night out at the bar, the movies, clothes to impress, etc…it is a never ending list.

Kate:  So where does that leave us?

Shannah: My challenge to you is to stop the spending and start the savings.

Here are a few rules we’ve come up with to help keep your savings on track:

Rule #1: Establish an Emergency Fund: The old adage is that you should have 3-6 months of basic living expenses put aside; however times are changing. With the way the economy has been lately, it’s not a bad idea to set aside a little more than that.  My challenge to you is to save 9-12 months of basic living expenses.  Basic living expenses include all the items that you HAVE to pay every month, i.e. rent, car payments, credit card bills, etc.  Use your Money Map to determine all of your basic living expenses. Add this number up and then multiply it by at least 9, but 12 is best.

For example:

Basic Living Expenses= $800 a month

Multiply by 12= $9600

Now that you have the amount set that is your *ideal* savings, you need to figure out how much per month you can actually save for the future, as in retirement.

Rule # 2: Pay Yourself First, Pay Yourself Automatically and Pay Yourself At Least 10%: It’s ok to be selfish.  You are your #1 Employee. It’s time to stop putting the companies you owe money to at the top of your list.  Paying yourself first is one of the most important money foundation principles you can learn that will be beneficial to you no matter what income you are earning.  Whatever your gross salary is, you should be putting at least 10% away for the future.

For example:

Salary before taxes= $30,000/year or $2500/month

10%= $3000/year or $250/month

Set up something automatic so that you won’t even be tempted to spend that money.  And if your company offers any kind of a match, you absolutely must take advantage of it.  This is essentially free money!

**Another hint**

Once you create the habit of savings you can become creative about finding additional savings each

month.  For example:

• Do you really need that extra Starbucks per week, or can you add another $5 per week to your savings?

• Can you carpool to work and save an extra $35 per month on gas?

There are lots of creative ways to multiply your savings. Find what works best for you and make it a challenge and have fun with it.

You’ve figured out your *ideal* savings goal, figured out approximately how much you can save each month, and have started to think about creative ways to add to your savings. So what now?

Rule # 3: Compound, Compound, Compound: Our advice for you is to put your emergency fund money directly into a high-interest bearing account or a money market account and don’t touch it until you need it. Most bank savings accounts offer the lowest interest accrual, sometimes as low as .25%, while other savings accounts, such as the Charles Schwab High Interest Savings, accrue interest starting around 1.5% (it was higher before the economy crashed).

You might be thinking, “that doesn’t seem like that much of a difference”, right? Well, let’s see it in action:

Savings $100 a month x 8 years earning 0% interest= $9,600.00

Savings $100 a month x 8 years earning .25% interest= $ 9,810.65

Savings $100 a month x 8 years earning 2% interest=   $ 10,622.72

As you can see, the power is in the interest amount! That’s because it compounds on top of itself month after month, year after year.

Once you have your emergency fund established, you’ll likely want to invest any additional savings in the stock market, which averages a 10% annual return.

Savings $100 a month x 8 years earning 10% return=   $ 15,309.73

And even better, since we’re in our twenties, we’ll be investing for closer to 40 years.  Check out these savings with the magic of compound interest!

Savings $100 a month x 40 years earning 10% return=   $588,758.10

The real beauty of compound interest is only seen when you’re investing for a significant period of time.

So that is why it is so important to start young.

The difference between starting to invest $100 a month at age 20 and at age 30 is a whopping $369,871.05!!!

We’ll talk more about the stock market later, though.  Right now, just be working on establishing an emergency fund.

Savings will give you power and control over your future. It will allow you to purchase a home when you are older, take a dream vacation, or better yet, provide you with a great base for all those “Oh No” expenses that come up in life.

If you remember, and follow, the 3 simple rules above you will be ahead of approximately 99% of your friends. So I encourage you to take these lessons and email them to all your friends…what a great achievement it would be if we all learned how to save.