Saturday, December 27, 2014

How to Save for Your Future

My youngest brother just began working at his first job where he makes right around $100 per week and sometimes even less. I was talking to him one night and explaining to him that he should be aware of this trap that people, especially those just getting into the workforce, fall into. This trap is that they don't make enough money to be able to save. When most people think of saving money they are under the impression that they have to make enough money to be able to "save" hundreds of dollars out of each pay check for it to even be worth it. You have heard the phrase "everything is relative," well so is saving money. A guy that I very much respect and look up to once told me that you should save 25% of everything you make. In a case such as my brother's, this means he should save $25 each week. This doesn't seem like much but over the course of a year this means that he would have saved up $1,300 at a job where he only brings home $5,200. This is a good amount of money for a college student only making what he does, but more important than that is that he is learning to be responsible with his money at a young age.

The reason that I really like what I call the "25% Rule" is that it adjusts based on how much you make. I have many friends that bounce from job to job in order to make more money. A year later they haven't saved up any more money, if any, than they did at the job where they were paid less. This is because for the average person, the more they make the more they feel like they have to spend. Using my rule, you still have more money to spend from having a higher paying job or career but I look at it as: "Make more, save more." I like to think of this as the money equivalent of the famous glass half full vs glass half empty example.

Going back to my brother, a college student who is aspiring to be a physical therapist, as he progressively increases his income over the course of his life, he will also be able to directly increase his savings. For simplicity purposes, lets say that once he becomes a physical therapist, he will make $80,000 per year and if he sticks to my rule, this would mean that he saves $20,000 each year. After just 5 years, he will have saved up $100,000. You add that to the almost $10,000 that he can save over the course of his college career if he were to continue making just $100 per week and he will have a total of $110,000 and even more if he chooses to invest his savings over time. Here in Kentucky, that is enough money to buy a nice house with cash and never have to worry about having a house payment

My point from all of this is that just because you aren't making as much money as you would like to right now, you are still making enough money to be able to start saving and learning how to be responsible with your money.