Congratulations on your graduation!
If you recently graduated, whether it’s from college or high school, there are some important decisions ahead of you. Many of these decisions don’t necessarily have right or wrong answers, so it’s OK if you’re not sure whether or not you chose the “right” answer.
However, one great decision you can make is to save for the future. No matter whether you’re able to save a little or a lot, saving money now can help ensure your financial freedom later.
Here are some reasons why you should start saving now:
Saving Becomes a Habit
One of the best things you can do is to start saving money as soon as you graduate so that it becomes a habit.
Why should you want saving money to become a habit? Saving money is sort of like being on a diet, except it has to do with money rather than food. While there’s a certain element of sacrifice involved, the sooner you get over that hurdle, the easier it will become. Eventually, you’ll no longer see saving money as a sacrifice, especially when you begin to experience the benefits of being cash rich.
The Time Value of Money
It’s important to have a certain amount of savings in the event of an emergency or a temporary loss of income.
However, the real payoff of saving money is investing it. This gives you an opportunity to “put your money to work for you.” That’s another way of saying that the money you save is earning you even more money.
For example, let’s say you save enough money in an emergency fund to cover at least three months’ living expenses. You then invest the rest. If you can invest $500 per month, earning an average annual return of 7% in a portfolio of stocks and bonds, your account will be worth over $250,000 over twenty years even though you only had to invest $120,000.
Additionally, you don’t need to know much about investing in order to actually invest. There are automated online investment platforms, called robo-advisors, that can create a portfolio for you and handle all the investment management — all you need to do is fund your account. Each will provide professional investment management for an average fee of around 0.25% per year.
If you already started investing in stocks and happened to sell some stocks this year or you are considering selling, check out our Capital Gains Calculator to see how much you will be taxed whether you sell in less than a year or hold on to your stock longer than a year. To help you save money and help with your tax planning for tax year 2022, you can also find out if you have a capital gain or loss and compare your tax outcome of a short term versus long term capital gain, whether you already sold or you are considering selling your stock.
Creating Future Options
You probably have certain goals you want to reach early in life. Those might have to do with travel, having certain life experiences or creating a specific lifestyle. However, you don’t always know how your goals and preferences will change throughout life.
If you’re financially constrained by high debt and low savings, your future options could be limited. But if you’ve gotten into the savings habit and have accumulated a strong savings base, along with a low debt lifestyle, you’ll be in a better position to pursue your dreams and goals in the future.
Everything in life — including certain choices and lifestyles — requires money. The more you can save, the easier it will be to convert those choices into reality.
For example, though you may be quite content with your current job, you might decide to go in a different direction in the future. You may decide to change careers, start your own business or even take some time off to explore the world. Any of these big life changes will be more easily accomplished if you have a safety net of savings.
Getting a Jump on Retirement Savings
You may already be aware of a movement commonly referred to as “FIRE” – Financial Independence, Early Retirement. It’s become an amazing trend recently, and there are plenty of stories of folks who have saved aggressively and retired in their thirties or forties. Even if you don’t plan to retire early, there are lessons you can learn from their experiences.
By saving aggressively and investing prudently, you can amass a nest egg that gives you the option to retire early. While you don’t have to actually retire early, having the option gives you flexibility.
Additionally, investing in your retirement can help you lower your tax bill through tax-deferred contributions to an employer-provided retirement plan, tax-deductible contributions to an IRA and the Saver’s Credit that you may get just for investing in your retirement.
Don’t stress about mastering your savings. While these tips will hopefully help you feel more confident, ultimately, you have to do what you feel comfortable with and save what fits into your budget.