Over the last few weeks our blogs have been focused on money. We have covered cheap and free things for students and identified ways for you to grow your rainy day fund. While learning to be frugal and save money is an essential skill, the next step is figuring out what to do with all of that money you have saved. Should you keep it all rolled up in a tiny wad in your sock drawer, let it sit in a bank account, invest in assets such as a new car or take it all and put it into stock market? The opportunities to manage your money are endless. Here are some things that you should think about.
What is Your Goal?
Do not save money just for the sake of saving. If you identify short and long term savings goals you are much more likely to take financial action Part of setting those goals is writing them down!! Make a list of what you would like… a new car, a house, money for a trip. Once you have them written down start figuring out how you are going to get there!!
Savings Account (not just a clever name)
Instead of keeping all of your money in one account, open a second savings account. A savings account is a great tool to help track your short term savings goals!! Let’s say you want to take a trip for March break next year and figure out that it will cost you $2500. You simply start putting money into your savings account, trying to reach that goal. When you get to a milestone (enough money for the flight for example) you take the money out and use it immediately. Not only will having a savings account help you reach your goals, by pre-planning the trip you avoid putting it on credit.
Nobody likes to think about retirement when they are 21. That is however the best times to start thinking about it. Understanding compound interest will help you understand why. This might be a good point to take a deep breath, especially if math is not your thing.
Imagine if you invested 2,000 a year every year and your rate of return was 10% compunded annually.
- In year one you would put in $2000. At the end of the year you would earn $200 in interest ($2000 x 10%) leaving you with $2200.
- In year two you put in another $2000, bringing your total to $4,200. At the end of the year you would earn $420 in interest. ($4000 x 10%)
What is important to see is that in year 2, $20 in interest is earned off of the interest you earned the year before. ($200 x 10%)
This is the concept of compund interest. Essentially you earn interest on interest.
So why does this concept show how important it is to invest at an early age? See the table below outling two different saving scenarios. Continue to assume $2000 per year at 10% rate of return.
|Age (Start Investing)||Age (Finish Investing)||Total Years Investing||Total Personal Investment||Final Value of Investments at Age 65|
- In Scenario 1, you start investing at age 21 and stop completely at age 27. Although you have only put in $14,000, by the time you retire compound interest will have grown your investment to $664,000.
- In Scenario 2, you wait until you are 28 to start investing and you invest every year until you retire at 65. In this scenario you will have contributed $74,000 and when you retire you will have only grown your investment to $660,000
This shows how important it is for students to start investing in their future today. By starting at 21 years old you can save less but earn more!!