Money Talks: Tips for managing your money "An early start on good saving habits"
Encouraging saving habits early in one's career can lead to a lifetime of
financial security.
(Money Talks) -- Question: My 21-year-old daughter makes $80,000 a year working
at a large firm. She has very low expenses, so I'd like to see her sock away a
huge amount of money. I told her that if you get used to spending a lot each
month on "fun" stuff, it will be much harder to save down the road. I'd also
like to see her bypass the high-end investment firms in favor of less expensive
alternatives. What do you suggest? --Tom F., Chatham, Illinois
Answer: I'm with you, Dad. I think it's a great idea to encourage the habit of
saving regularly early in one's career (or life, for that matter) so that it
becomes almost second nature.
But let's not overdo it. As Cyndi Lauper once famously put it, girls just wanna
have fun. (Boys too, I might add.) Nor does having a good time necessarily make
you some sort of financial reprobate.
I'm not sure how much you have in mind when you say you want your daughter to
sock away a "huge" amount of money, but you don't want her setting a goal
that's so high that saving becomes a privation and unsustainable. She would be
making the same mistake as people looking to control their weight who go on a
crash diet.
Your aim here, therefore, should be to get your daughter to think of saving as
a natural part of life, a regular expense you must budget for just like any
other (which, in fact, it is, as I explained in a column about how to live
within your means and lead a financially responsible life.
So, how can one inculcate the savings habit in a way that avoids dealing with
firms that charge onerous commissions and fees?
Well, the first thing you can do is to encourage your daughter to sign up for
her 401(k) plan, assuming her company offers one (as most large firms do). You
might suggest that she contribute at least enough to get the full employer
match. If doing that doesn't bring the combined contribution from her and her
company to 10% of her salary, then she should kick in whatever it takes to hit
that goal, which is a decent starting point for someone her age.
I can't guarantee that her 401(k) plan's expenses will be lower than those
she'll encounter at outside investment firms. But unless your daughter finds
that, after evaluating her 401(k) plan, it is truly horrendous, it's highly
unlikely that she would be better off forgoing the tax savings, convenience and
other benefits of a 401(k) to save outside the plan.
In addition to her retirement savings, your daughter should also have about
three months' worth of living expenses in a bank money-market account or
savings account that pays competitive yields.
The idea isn't to earn big bucks on this money; that's not going to happen in
today's environment. Rather the aim is to have a safe stash that she can draw
on in the event of a financial setback or emergency so she doesn't have to tap
her 401(k) or other retirement savings and possibly incur taxes and penalties
for early withdrawal. She should be able to build this emergency fund while
contributing to her 401(k).
Once she's built up an emergency fund, your daughter can either divert the
regular savings that was going to that fund to her 401(k), thus boosting her
contribution rate there. Or she could put the money into a Roth IRA that would
complement her 401(k). By funding her Roth with low-cost mutual funds like
those on our Money 70 roster of recommended funds, your daughter can avoid
bloated fees that act as a drag on growth.
One final note: What may seem straightforward to someone who's well versed in
financial affairs may be daunting to a neophyte. The last thing you want to do
is overwhelm your daughter with so much information and so many choices that
you paralyze her into inaction.
So break this process down and, without being overbearing, help her put the
pieces into place one at a time. Help her get signed up for the 401(k), then
open the emergency account, then consider the Roth.
She can always fine-tune her choices later. The most important thing is to
instill the habit of saving so that it becomes routine. If your daughter
manages to do that, she'll improve her chances of having fun not just at 21 but
for the rest of her life as well
