Whether it is from a birthday, holiday, or savings from a job you worked – as a college student or recent grad it is a good feeling to have a few hundred unplanned bucks on hand. While it is tempting to finance your next party or buy some new kicks with that money it may be time to be a bit more fiscally responsible with your savings. Here are some ideas as to what young adults can do with a bit of extra savings.
Although it’s hard to imagine your retirement when you are in your early 20’s it will be here before you know it. Retirement finances are one of the hardest things to prepare for in life. No one knows how long they are going to live, how much money they are going to need, and whether or not they saved enough. Investing in your early 20’s is actually a great way to get started, even if you are not putting away thousands of dollars a year. The reason for this is simple – compounding interest. When multi-billionaire Warren Buffett was asked to name the single most important factor in his success he pointed to a simple idea – the power of compounding interest. This is the idea that interest is paid on the amount in a savings or retirement account for a period of time. After that time the interest is added to the account and the interest for the next period of time is calculate on the original balance plus the interest from the first period. This continues over time compounding the interest in the account. Starting your savings for retirement early gives the money you save more time to grow. There are many different types of retirement savings accounts – which I will go into more detail in a later post.
If saving for retirement sounds a little lofty of an ambition for your small amount of savings you may want to look at putting it into a semi-liquid savings account. How liquid an asset or savings account is simply refers to how easy it is to extract your money from it. A checking account is about as liquid of an account as you can get because you have several ways to immediately get money from the account, such as checks, debit cards, ATMs, and banks. Additionally, the less liquid an account is the more interest a bank or credit union is willing to pay you to hold your money. This is because they are surer that they will be able to use your money for their own investments or loans without you being able to directly spend or extract that money. A good example of this is a simple savings account. Simple savings accounts are slightly less liquid because you must either go directly to an ATM/bank or transfer money from the savings account to the checking account before you can use the funds. To compensate customers for this added inconvenience banks typically add a very small amount of interest every month or period of time to the account based on the amount of money in it. While this is usually only a few cents, it is more than the zero interest most checking accounts earn. Certificate deposits (CD’s) and money market accounts are great ways to go a step beyond a simple savings account. These types of accounts can give a higher rate of interest than simple savings account for those looking to grow their money. CD’s are useful because you can set aside a certain amount of money for a set period of time. For example, if you know you want to make a big purchase in a year you can set aside your savings in a yearlong CD. When the CD “matures” in a year you can withdraw your money that has now earned more interest than it would in a simple savings account. If you need your money before a year however, you usually have to pay a fee to withdraw it before the CD matures so be careful. Regardless of what type of savings product you choose make sure you understand all of the terms and conditions and do not be afraid to ask a banker for more information before signing or opening an account.
Probably the best thing for college students or recent college grads to do with a little extra savings is to pay off student debt. While certainly not as attractive as seeing your money earning interest in a savings account, paying off any debt you may have is actually the most fiscally responsible thing to do with some extra cash. Here is why: when banks make a student loan to you they are not doing so with their own money. They take in money from someone and pay an interest rate to them. This is essentially the same thing as the rates you receive in simple savings accounts, CD’s, and any other account that earns interest. They then turn around and give that money to you in the form of a loan. They also charge you an amount of interest on top of the loan that you have to pay back. In order to make a profit the amount of interest they charge you has to be higher than the amount they are paying on savings accounts. In other words, the amount you are being charge on debt will almost always be much higher than the amount of interest you would get paid in any type of savings account.
While saving money can give you a great sense of accomplishment, paying off debt if you have it, is much more fiscally responsible. While you cannot see it as easily, the savings from paying off debt will almost always be much larger than any amount of interest a savings account can earn you. If you do not have debt to pay off longer term savings accounts and retirement accounts can be a great way to start a fiscally sound way to live as you begin to enter the “real world”.
Financially Stephen grew up in a family that preached saving and living below your means. That, in part, translated to his interest in Economics, especially how economics can affect individuals’ financial lives. Through his financial markets class in the fall of 2011, he furthered this interest by analyzing macroeconomic events. Stephen believes that finance, personal finance in particular, is a subject severely left out when it comes to public schooling in this country, and it is a problem that has manifested itself and contributed to many of the problems seen today. He also believes that education is the key to improvement and hopes that through his writings he will be able help people learn about finance, macroeconomics, and how to be financially savvy for the future.
In his free time Stephen enjoys playing and watching sports, wakeboarding, sailing, and country music. At UNC he has participated in Strive for College, UNC Dance Marathon, and UNC Relay for Life.
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