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Sunday Journal
Savings Strategies for Young People
From the Wall Street Journal of Sat, 20 Dec 2014 20:56:10 EST
Ryan Snook

Tatum Lindsay knows she should be saving, but she’s not quite sure where to start. The 22-year-old interned at Harvard Law School’s online-education outfit and worked as a writer on a contract basis with the Smithsonian Institution since graduating from Mount Holyoke College in South Hadley, Mass., in May. Recently, her pretax income came to about $3,600 a month, enough to cover her $1,000 rent check and living expenses, with some cash set aside for taxes. Ms. Lindsay also keeps about $2,000 in her checking account. But she says she doesn’t have savings or retirement accounts, or a concrete plan for any leftover income.

“I don’t know exactly what my savings should be for,” Ms. Lindsay says, adding that she’d like to formulate a plan to start saving for emergencies and retirement.

For many young workers, it can seem like after rent, living expenses, student-loan or credit-card payments and incidentals, there’s little left over from their monthly take-home pay, making it difficult to establish and execute a savings plan. So how’s a 20-something to save? Here are some strategies for socking away cash on a tight budget:

Set goals. If you’re not sure where to start, begin tracking your spending, says Kathleen Grace, a certified financial planner and managing director at financial-advisory firm United Capital. You might be surprised to see where your dollars are actually going, she says.

When budgeting, keep in mind the 50-20-30 rule, says Stephany Kirkpatrick, a certified financial planner and vice president of operations and financial advice at personal-finance site 50% of your budget should go to fixed costs like rent, utilities and car payments; 20% toward financial goals like building an emergency fund, paying down credit-card debt and saving for retirement; and 30% toward flexible spending, i.e., variable costs such as groceries, entertainment or shopping.

Within the 20% for financial goals, prioritize setting aside at least one month’s net income in a separate savings account for emergencies like unforeseen medical expenses or the loss of your job, Ms. Kirkpatrick says. (Ultimately, you should work toward saving six months’ worth of net income, she says.)

Next, work on paying down so-called “bad debt,” like high-interest credit-card debt, financial experts say.

Then, focus on retirement. If your employer offers a 401(k) or similar retirement-savings plan, be sure to take advantage of it by contributing, Ms. Kirkpatrick says. Ideally, you’d contribute enough to receive the company match, if one is offered, she says. But if that amount seems too steep at the moment, don’t wait—starting to save a little now is better than waiting, she says.

And if your employer doesn’t offer a plan, consider opening a Roth individual retirement account—to which you contribute after-tax dollars—which will allow your contributions to grow tax-free until retirement.

Automate everything. Once you’ve set savings priorities, it’s time to execute—and automation is your friend. Set up your direct deposit so that a fixed amount goes directly from your paycheck into your retirement or savings account without ever hitting your checking account, Ms. Kirkpatrick says. That way, you’re paying yourself first, and you won’t be tempted to touch those funds.

Another option: Set up an automated recurring transfer from checking account to savings account (but not the other way around), Ms. Kirkpatrick says.

Self-audit. Think about all the various subscriptions you have to magazines and entertainment sites like Netflix , Hulu and Spotify—or even cable, Ms. Kirkpatrick says. Do you really use all of them?

Make a commitment to canceling at least two of your subscriptions, she suggests. Each might only be a few dollars a month, but having a handful can add up quickly, she says. And think of your decision as a trade-off for better financial health, rather than a sacrifice, she says.

Know when to say no. “Being social often involves eating and drinking—and if you’re doing that often, it adds up,” Ms. Kirkpatrick says. She suggests planning out your social calendar for the month, budgeting for events important to you, like drinks with colleagues or a friend’s birthday dinner.

Then, when spontaneous events do arise, you can “make active decisions about whether you should say yes to something that’s not already on that calendar,” she says.

Cash only. If you tend to overspend with your credit card, put yourself on an “all-cash” diet, Ms. Kirkpatrick suggests.

Put away the credit card and carry with you in cash only what your budget allows, she says. That way, if you run out of cash, your spending spree is over by default, she says.

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