In two recent columns for TheStreet.com, Cliff Mason says saving is short-sighted for 20-somethings.
Hey, big spender, slow down before you speak for our generation. I think we know better, and so I offer this practical rebuttal. (Yes, Mom and Dad, I know you're shocked.)
sums up the core of my view: "Throughout your twenties, your priorities should always be to get out of debt, build emergency savings, and begin saving for retirement. They aren't the most exciting financial goals of your lifetime, but once they are out of the way they provide solid footing for financial security for the rest of your life." And that's referring to high-interest debt, as the lower-interest variety isn't necessarily harmful.
First, a confession. When I read the column "
Rescue Yourself from Reckless Saving," I giggled. It's nothing personal, and judging by the conversations he's triggered, Cliff should be a great addition to our site.
But a 22-year-old who jokes that his dad lent him enough money to buy a New York City apartment advising the rest of us in our 20s to go forth in the name of materialism
be circumspect about our savings seems equivalent to Paris Hilton advising on how to party: It's been fun for me -- everyone come on in. Let's face it, if every recent college grad embraced such acts of irresponsibility, the majority of us would be SOL.
Most recent grads find that their expenses overwhelm their income, and they live paycheck to paycheck, not by choice but because there isn't a plain-sight alternative, and any notion of spending even more is out of the question. The experts (whom I imagine are called so for a reason) prescribe the big, bad word -- budget -- so that we can get past the here-and-now and pin down financial security for the next chapter in our lives.
Crazy, yes, but there are small steps you can take to put aside a few bucks without compromising your standard of living (if there exists such a thing on a typical starting salary). Click here for a
With any luck, you won't even notice that your closet is short a pair of Express jeans with rhinestones on the pockets, and it won't kill you to cut yourself off before you buy the entire bar a round of Irish car bombs.
Admittedly, I'm as guilty of retail therapy as the next 25-year-old girl with a mild addiction to
, and my finances leave something to be desired. But I do buy into the wisdom of at least trying to budget in your 20s and taking a swing at banking the proverbial 10% (or whatever you can muster) of your paycheck. Here's why. (Caveat emptor: All of what follows will seem absolutely obvious, and that's exactly the idea.)
1. Money Saved = More Money
I'm going to take a shot in the dark and assume that you wouldn't be reading this Web site if you didn't already grasp the concept of putting your money to work.
To watch Elizabeth Trotta's video take of this column, click here
I remember when I first graduated from college, I read an article in
that suggested college grads first try to save $4,000 to invest. Rarely does money free-fall from the powers that be, so when you're just starting out and waist-deep in debt (the average college grad has $30,000 in student loans and $3,000 in credit card debt), you have to save to accumulate money to invest. Or you could buy a super nice stereo. But how often does a high-end stereo make you money? In some cases, invested money can earn money and attract some "free money" as well.
"Do you seriously want to start contributing to your 401(k) when you're 22 or 23?" asked Mason in his column. "There's something heartbreaking about that idea."
I'm a self-described sap who cries at sad movies and weddings, but I'm confident there is nothing heartbreaking about free money. This should be a no-brainer. If you're anything like myself, you worry that you need the cash you would invest now to pay off debt ... or to buy clothes, concert tickets or Tuesday-night mojitos.
But look at it this way: Typically, your employer will match part of your contribution. (Free money.) And your contributions are taken out of your paycheck before taxes are taken out. (More free money.) Anyone who likes to spend can surely get to like the idea of free money, right?
Here's a summary of an example
The Los Angeles Times
used in "Math lesson for college grads": If your employer matches 50 cents to your dollar, and if federal and state taxes drain 25% of your paycheck, $75 of spending money could equal $150 saved if you direct it to your 401(k). Now if you take it out, it's taxed, but saved in a 401(k), your money is worth twice as much as it is in pocket, and that's before you even factor in the value of it as an investment.
The math: $100 (earned money) + $50 (from your employer) - $0 (for tax) = $150 saved and in this case invested. Or, if you take it out, $100 (earned money) + $0 (from your employer) - $25 (for tax) = $75 to go spend. Your money is simply worth more invested.
Most importantly for those of us in our 20s, because of compounding interest, it really does matter if we start now. In "To get rich, start saving in your twenties," MSN Money explains, "If you begin saving for retirement at 25, putting away $2,000 a year for just 40 years, you'll have around $560,000, assuming earnings grow at 8% annually. Now, let's say you wait until you're 35 to start saving. You put away the same $2,000 a year, but for three decades instead, and earnings grow at 8% a year. When you're 65 you'll wind up with around $245,000 -- less than half the money."
Sadly, the last-mentioned article points to a study by human resources consultant Hewitt Associates that found that only 31% of Generation Y workers (those born in 1978 or later, who are now in the thick of their 20s) who are eligible to put money into a 401(k) do so. One more reason the rest of us should: The income set aside isn't taxable, and that means, obviously depending on salary, we could dip into a lower tax bracket come April.
2. Money Saved = Safety Net
The bit of money you manage to scrounge will be your safety net for the unexpected and for when things go terribly, sometimes irreparably, wrong. What happens if you lose your job (for instance, due to writing feisty rebuttals) or if your cutting-edge start-up folds and you need to survive for a bit while you find employment?
When the engine starts afire on the turnpike, the cat eats a shoelace or your best friend decides to get married on the other side of the country and asks you to throw the bachelorette party in Las Vegas, you'll be glad you saved. Yes, there are always credit cards. But put a $2,500 engine on a 7% interest credit card, and you'll feel like a complete idiot.
These things happen -- it's why you rarely cross the finish line with money you've saved for "just-in-case." And if you do get to the end with all your just-in-case cash still in hand, then no, you don't have a life-altering lump-sum of money as Mason points out, and you may have skipped out on the newest iPod or whatever typically strikes the fancy of your cash. But you have peace of mind -- and you have demonstrated intelligence, which is good.
Furthermore, if you consistently spend your net income every pay period and thus have no just-in-case cash, it's easy to fall prey to high-interest credit cards for emergency relief. According to the
, credit card debt for 25-to-34-year-olds nearly tripled between 1983 and 2001, to $12,000 from $3,989. A few high-interest credit card payments a month will shrink your disposable income and detract from the standard of living you've achieved.
3. Money Saved = More Options
In "'Generation Debt' is going into the red," MSNBC contributor Vanessa Richardson explained, "With the median home price rising by 26 percent in the past five years -- while young adults' income has gone up less than 10 percent -- people in their twenties are playing an endless game of catch-up."
Think of saved money as your chance to bridge this gap or get ahead, or your down payment for god-knows-what. It's your foundation for major purchases and life events, such as buying a house, relocating, getting another degree, starting a family or starting a business. Yes, you will no doubt borrow money for these things, so cash on hand isn't a have-all end-all.
But let's say you decide to take out a low-interest loan instead of paying for something despite having enough cash on hand, because in this case your money would earn more invested than the interest on the loan will cost. At least you have that option; with no money in the bank, your money strategizing is limited.
Also keep in mind that even with no cash on hand and questionable credit, you will still find people who will lend you money. But we've seen the results of subprime lending. Do you want people scouting your house because they're confident you'll foreclose? Saving money now won't prevent this, but spending recklessly for a decade will help create it. Just a guess.
It's true, I dabbled in conventional wisdom for this rebuttal. But I don't see the future looking much different for people who spend irresponsibly in their 20s now from the way it did in the past.
Though Mason disagrees, "In fact, I think saving your money might even be short-sighted. How will things really look 40 years down the road?"
Well, unless all currency loses value (barter for a semi-automatic weapon and talk to our metals writer Simon Constable about what to do in this case) or we're all certain that we can win the lottery or run hedge funds that invest in companies that find
sunken pirate ships with Aztec gold, keeping the reins on our spending and trying to save a bit in our 20s is probably a good idea.
The average American has negative savings now, and new grads start out suffocating under loads of debt. We all know saving is a tough pill to swallow. So here I turn to a bit of wisdom from Warren Buffett: If you find yourself in a hole, the first thing to do is stop digging.
Worrying about the backlash later in life, Mason warns, "If you really believe you can get through your 20s like that and not be absolutely miserable later in life, be my guest."
But if I remember correctly, the richest man in Babylon was the happy one.