To Save Enough Start Early!

Aug 20, 2013 by

Piggybank & cashI’ve got another worthwhile guest post for you today. (You’re tired of hearing from me anyway, right? 🙂 ) Please welcome Patrick Russo, a wizard at getting the most from your savings.

A survey released by Wells Fargo earlier this summer revealed that a majority of millennials (aged 22 to 32) wished they had learned more about personal finance in either high school or college (4 out of 5 felt it should have been taught in high school). One of the top three financial topics they noted being deprived of was “how to save for retirement,” which is enigmatic considering that a full 70 percent of survey respondents are “very or somewhat confident” that they will save enough to achieve the lifestyle they would like to have in retirement. So why do a large percentage of millennials regret missing an important aspect of personal financial education while simultaneously believing that it will not keep them from achieving their goals in retirement?

As a millennial myself, I would like to think that this disconnect exists because we are a resilient and determined age group with an innate belief in ourselves to make up for lost time. While that may be true to some extent, perhaps a more honest (and humbler) reason is that we have absorbed lessons in saving money the hard way in the school of experience, and we are regretful because they could have been more easily learned. Case in point: the 2008 recession and student loan debt.

Failure to Launch

At nearly a trillion dollars, outstanding student loan debt has turned into a major inhibitor for millennials trying to save for retirement. Over a third surveyed in the Wells Fargo study said that student loans are their biggest financial concern – a concern that is also causing millennials to put off home ownership and delay or forgo having children. Simply put, the debt is causing a failure to launch for many in this demographic.

The overarching lesson learned is that debt is a risky tradeoff for security, and savings are the only authentic source of genuine investment and long-term growth. This is evidenced by the spike in the personal savings rate, which reached its highest point in fifteen years in the wake of the 2008 recession. Despite American culture’s (and currently the Federal Reserve’s) fixation on consumption, millennials are still confident in their retirement prospects because they have realized the importance of saving for the future, and that nothing in this economy is guaranteed.

With hindsight right at twenty-twenty (or close anyway), it is easy to lament the naiveté of a younger age. Rather than waste a learning opportunity on pity, though, it would be useful to consider what an adequate education on “how to save for retirement” would have entailed in those crucial high school and college years. How can the lessons millennials have learned and are still learning translate for the next generation?

Early Emphasis

For starters, any education must begin by convincing high school or college aged students of the importance of saving for the future in the first place. Most are dependent on parents or family for financial support and thus lack the imperative to save (or even earn) for themselves. Retirement age seems millennia away for a 15 or 21 year old, so the idea of saving is easily put off as a problem for the later self. Parents, school administrators, and college officials should develop practical money management curriculum for their soon-to-be millennial-aged children and students. At the heart of any curriculum should be the mantra that earning comes before spending. Many younger students will be ambivalent until they realize that access to desirable events and material goods cannot be gained by mere reflection or self-entertaining alone. Also, interactive discussions of real life case studies about retirees’ regrets and millennial debt are helpful to undergird this early impartation of wisdom. Emphasis on a routine of saving instilled at this age carries considerable weight into the twenties and translates more readily into motivation for retirement planning.

What’s in the Toolbox?

Just as future pilots need to gain familiarity with cockpit instruments to learn how to fly a plane, so too do high school and college students need exposure to the budgeting and financial planning tools that will teach them good habits of saving. Though they both hold money, there is an effective difference between a shoebox and a bank account – cardboard doesn’t do as good a job keeping up with inflation as does a savings account or CD, for example (although the gap is narrowing!). Many banks and credit unions have accounts specifically designed for teenagers and students – some that even come with rewards for meeting certain savings goals. Personal finance smartphone apps are also great tools for students to become familiar with, as they provide a flexible and ubiquitous way to manage expenses and track income. The Mint and Simple apps are two of many examples, and if utilized at a younger age, would make the budgeting process easier as finances get more complicated. Any financial education at a high school or college level should make students aware of the wide array of tools available in the personal finance space.

Preliminary Strategy

Anyone who has collected coins in a piggy bank or a jar has taken part in the simple process of saving a little over a long period of time that should be at the core of any retirement planning strategy taught to students. With all of the noise and drama on Wall Street being stirred up by stock and bond trading desks, it is easy for anyone to miss the slow, steady drip of a small savings faucet. This method, though far more boring, can be a lot more effective when started at earlier ages because of compounding interest. However, the stock market can still be a crucial forum in which future millennials learn about the basic concepts of price and asset diversification. Spreading your eggs out across multiple baskets is a strategy that high school and college students don’t have to visit the farm to learn. Also, measuring how much savings it would take to live at a certain income standard will help create realistic goals and expectations as far as career and family. Any personal finance training of teenagers or early twenty-somethings should begin with simple methods of saving money before progressing into more complicated investment arrangements.

Equipped with the emphasis, tools, and preliminary strategy before graduating from high school or college, future millennials will be better prepared to make wise choices about the debt they incur, and the attention they give to saving for retirement. This preparation may be a key to reversing some ugly savings trends among the millennial-aged and justifying the confidence they have for retirement. What methods and tools have you used to teach or learn about saving for retirement that would be helpful for this demographic?

Patrick Russo writes for DepositAccounts.com, a website that monitors products and rates at more than 7,500 banks and credit unions and pairs that information with comprehensive commentary, reviews, tools, and community forums to equip and guide depository banking consumers.

Disclosure: Money Counselor received NO compensation for publishing this article.

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  • Definitely start saving as early as you can! So many people think that they can start later in life and that they will be just fine. However, what will you do if something bad happens?

  • Moneystepper

    This is exactly why financial planning should be taught at school. Teach at 15 year old the difference between investing $500 at 18 years-old and $500 at 60 years-old and the next generation will be much better off!!

  • Patrick Russo

    Another interesting takeaway from the survey is that 78% of millennials reported learning “a great deal” or “somewhat” about personal finance from their parents. Parents were also the top choice when survey respondents were asked who their first source of guidance on investing would be.

    So, while schools are a great forum to learn about personal finance, it looks like parents and families could be the key influencers in prepping pre-millennials for savings success.

  • squirrelers

    Start early, both with earning and saving. But also, with the money lessons. The sooner the lessons are absorbed, the quicker the mistakes can be made when risks are lower.

  • Greg

    Definitely save early and save often.

    It really is too bad that a teenager has to make a decision about college and that decision can affect them financially the rest of their lives. I think it is important for parents to learn the lessons of the day and really make sure their kids understand the financial aspect of the school they choose, the major they choose, and the money it costs.

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