Winning plays for saving while you're young
Summary: It’s important to start saving as early as possible. Learn why—plus get tips on how to become a savvy saver.
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 somewhere tropical, but also shorter-term aspirations like adopting a pet or buying a car.
Regardless of your age, retire the notion that it is too early to save, and start saving early so you will have the freedom to enjoy the future you envision for yourself.
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 video below demonstrates the magic of compound interest.
Winning plays for becoming a savvy saver
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 ways to save smarter:
- Start early. Take advantage of compound interest so that you can enjoy the fruits of your labor in the future.
- Set clear goals. It's a lot easier to save when you have a goal in mind. 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Save on taxes. Make sure you educate yourself about eligibility for tax deductions. 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 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.
The source of this Morgan Stanley article and video, Winning Plays for Saving While You're Young (November 2020), is part of Morgan Stanley’s series The Playbook: Your Guide to Life and Money. Learn more about the Playbook other resources available to help you navigate various life milestones.