Save Now, and Your Life May Be None the Richer

Don't let all the reasons to save distract you from all the reasons to spend.
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If you haven't read Elizabeth Trotta's savage takedown of my first two columns about the rationale for saving while you're young, take a look here:

Heed the Wisdom of Reckless Saving.

Elizabeth makes a great case for saving money in your 20s, but like a great deal of the conventional personal finance wisdom, it's not relevant to most members of Generation Y. I'm not dismissive of all the good reasons to save money, but I do believe there are some circumstances in which saving money isn't worth the self-sacrifice.

Saving isn't a slam dunk; like any economic decision, it's a trade-off.

I don't want to cover ground that we've already been over in my first two columns,

Not About Making Friends, It's About Spending Money and

Rescue Yourself From Reckless Saving, but after reading Elizabeth's rebuttal, I feel like I have yet to get through to those of you who believe that saving is right in all situations and that anyone who says otherwise is a lazy idiot who thinks accruing credit card debt is fine, spending thousands on discretionary items makes sense and paying your bills on time is unnecessary.

Saving has plenty of advocates. In some circumstances, it's the right thing to do, but that does not make it correct for every situation. My opposition is less to saving than to the reflexive belief that everyone needs to save. I don't believe anyone is well served by treating a complicated subject as though it's the simplest thing in the world.

I've said that I believe it's irresponsible not to take some time and get all the impulsive behavior, all the fun stuff, out of your system. I've said that when you're young and you've just started working, you'll get more out of spending $100 today than $500 40 years from now.

But I only feel like I'm getting through to the people who already agree with me, and since I'm not one to preach to the choir, I'm going to take another approach.

Like any other use of your cash, saving money has costs. Mainly, we're talking about opportunity cost. Every dollar you save is a dollar you can't spend. It's important to understand what this means in concrete terms.

Suppose you earn $40,000 a year, which is about average for someone fresh out of college -- and well above average for a recent liberal arts graduate such as myself. Using last year's tax schedule, you'd owe $6,557.50 in income tax on $40,000 of taxable income, and another $3,056 in payroll tax. You're out another $2,740 in income tax if you live in the state of New York, but for the sake of round numbers, let's say you take home $30,000 in after-tax income.

We're told to save 10% of our pretax income, so $4,000 for this example. As far as I'm concerned, this is the most important question that we need to deal with: What's $4,000 to someone with $30,000 to spend annually?

It's not iPods and expensive clothes. It's the difference between living with an extra roommate and being able to use the bathroom when you want to, or living with your parents and having some independence and dignity. That money could be the difference between going out to dinner and staying in every night, or going out on dates rather than having no romantic life whatsoever. These are not small sacrifices.

Consider the case of taking on an extra roommate. If you're spending $1,000 a month on rent, which is a steal in New York and about average in a place such as Atlanta or Philadelphia, and already have one roommate, then taking on a second one will let you save the $333 a month necessary to put away $4,000 a year.

Is it worth it? With a reasonable 7% return, you'll have doubled that money in a decade. You'll also have to put up with cramped living conditions for a year, not to mention the potential damage that living with someone can have on your friendship.

If you don't care about these things, then save away. But given the choice between saving and privacy, most people prefer privacy. The conventional wisdom that says you should make saving a top priority is designed to scare people out of making decisions such as this one, even if the short-term costs of saving outweigh the long-term benefits for the person in question.

As many people pointed out in their emails to me and in the forum section of stockpickr.com, you don't have to spend lots of money to have a good time. That's certainly true, but cash sure helps.

I'm not talking about buying expensive clothes, expensive electronics or expensive cars. In fact, I'm an advocate of car-free urban living, just not for economic reasons. Sell your car and read some Jane Jacobs, the late, great champion of urbanism.

I would never criticize someone for buying an iPhone rather than saving, but when I advocate spending money over saving I'm primarily talking about spending on things such as rent, food and dates. You know, the necessities.

Even the most obvious, clear-cut reasons to save aren't so simple when you look at what you have to give up.

For example, contributing to your 401(k) is one of those no-brainer decisions that Trotta beats me over the head with. But take a closer look. Every dollar you stick in your 401(k) is a dollar you can't remove before retirement without paying a 10% penalty, and though many employers provide matching contributions, it's also common for them to vest their contributions over time. If you leave after a year, you might only get a fifth of that matching contribution.

Depending on the terms of the 401(k) plan and whether or not you believe you'll need that money in the near future, contributing might not make sense. There are obvious advantages to using your 401(k), but you know that already. If you don't have much money and don't plan to stay at your first job for long -- something true of many young people -- then it's worth knowing when you shouldn't contribute, especially now that employers can choose to automatically enroll you.

I know people who have opted to have part of their paychecks diverted to their 401(k) every month and also end up carrying large credit card balances because they don't have the money to cover their short-term necessities. There's no such thing as free money.

No decision is so universally right that you shouldn't at least consider your other options. This is especially true when we're talking about money. There are good reasons to save, but they're not so good that we should forget about all the reasons we have to spend.