Recently, a friend came to me for advice on how to tell her 25-year-old daughter about the importance of saving money. The daughter had just gotten her first career-focused job, but felt she wasn't making enough money to save, especially for retirement. My friend knows how important saving is - and saves as much as she can herself - however, she didn't have enough information to have a substantive discussion with her daughter.
This made me think about the bigger picture surrounding savings. It is essential for everyone to understand not only the general concept of saving, but also the particulars of how much to save, where to put your money, and how to prioritize your savings.
The low savings rate in America is the subject of much concern and debate in economic circles. Perhaps where this hits home most dramatically is the finding from the 2007 Employee Benefit Research Institute that almost half of workers saving for retirement report total savings and investments of less than $25,000 (not including the value of their homes or a defined benefit plan).
Given this grim reality, here are some things to consider - and do - to make sure you (and your loved ones) are on a positive savings track.
WHAT YOU SHOULD BE SAVING
When it comes to saving, you need to consider three important factors: time, the amount you save and your rate of return. While you can strive for a certain rate of return, there are no guarantees. I'm going to focus on the first two, where you have the most control.
Let's first talk about time. It's a simple equation. Start young and you have more time to save and take advantage of the power of compounding. Compounding occurs when your earnings are reinvested back into your original investment to continue earning. Over time, these compounded earnings can really add up.
As I said to my friend, when you're young, it's more about how long you have to save rather than how much. Her daughter needs to realize the value of her youth. Because she has time ahead of her, even if she sets aside a small amount every month, it can pay off in a big way down the road.
When it comes to the all-important goal of saving for retirement, time plus the amount you save work hand in hand. Here's why: The sooner you start saving, the smaller percentage of your income you need to keep to receive potentially big rewards. Conversely, the longer you wait, the larger amount of your salary you're going to have to put away each year to make sure your money will last as long as you do.
So how much is enough?
Here's a general guideline:
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