Written by Brianna Davis | Last Updated February 24th, 2020Brianna Davis is an outdoor enthusiast, rock-climbing novice, and singing in the car kind of girl.
When due dates, group projects, and studying for finals are on your mind, the last thing you want to think about is “How can I start saving for my retirement?” College students have so much life ahead of them that they usually don’t spend time planning how to save enough money to live out their dream retirement.
“With disappearing pensions and job opportunities, saving for retirement can prove to be difficult.”
For individuals born after 1981, there are speculations that Social Security will not be enough to live on. In fact, “...the trusts could be depleted by 2034, resulting in a 23 percent benefit cut across the board regardless of age or income.”
Luckily, we don’t have to rely solely on the government for our retirement. After speaking with several financial experts, here are a few things college students can do to start saving for retirement:
1. Take advantage of time
The most common advice among the 11 financial experts was the magic of compound interest. When you deposit money into a savings account, the bank will pay you a small amount each year for putting money into their bank. This money is called interest. When you leave your money in the savings account over several years that interest is called compound interest because each year your interest rate is applied to the current amount of money in the account.
Consider this example: “If you have $1,000 in your account (called principal), and the bank pays 2.5 percent annual interest, then you receive 2.5 cents for every dollar that was in your savings account for the entire year. After 12 months, you accrue an additional $25 in your savings account.”
Logan Allec, a CPA and owner of Money Done Right says, “Because time is on [your] side, small investments of $100 can turn into significant money roughly 35 years later when [you] reach retirement.”
Why is it so important to start early? Well, if you were to put in $2,000 a year ($16,000 total invested) into a Roth IRA from the age of 19 to 26 (7 years) and then let it sit till you were 65. You will have earned over $2.2 million. Now compare that to someone who doesn’t start saving money until they are 27 years old. They put in $2,000 every year from the age of 27 to 65 ($76,000 total invested) they will have only earned $1.5 million. Having invested just eight years earlier the 19-year-old earned almost double the amount of the 27-year-old and he put in less money.
You may not become a millionaire but even if you are only putting in $25 a month you will still have earned a lot more than those who start even seven years later.
“All of those years are of growth and compounding can supercharge the savings potential and give a college student a leg up on retirement.”
Jim White, CFP®, EA J.H. White Financial
2. Stick to a budget
College students are not known for having a large flow of income. Rather they are known for eating microwave noodles and ordering off of the dollar menu. That is where budgeting comes in. You would be surprised at the amount of money we spend on little things. For example, on your way to class, your routine is to stop by Starbucks and get a little pick-me-up. How much does that cost? Anywhere from $2.00–$5.00, maybe more. Instead of putting that money towards coffee, what if you put it in savings? If you were to put $5.00 a day into savings, at the end of the year you would have $1,825. Those are some expensive lattes.
Brandon Amoroso, a recent college graduate from the University of Southern California, suggests tracking expenses for a month to see where your money is going. Then put it into two categories: necessities and non-necessities. This will help you determine where you can cut back and put that extra money to good use.
When you get into the habit of depositing money into savings whether for retirement or for a rainy day, it will help you learn how to save when you are older. “If you start saving now when you really don’t have much to save, you’ll be so much better prepared to save when you start earning a substantial income. It’s that behavioral gap that prevents so many people from getting started. On the other end, if you DON’T start saving and get used to that income, it’ll be that much harder to cut back so you can save.” says Dr. Brandon Renfro, financial planner.
J. Douglas Wellington, a professor at Husson University with five degrees in finance and law, recommends that students should learn how to budget and live on less than their monthly income: “Many college graduates, with "new found" wealth, live above their means and will buy a new car, go out to eat and take nice vacation trips. If you learn to live below your means, buying a used car, cooking your own dinners and going on day trips, you will have the extra money you need to put away and build a retirement fund.”
3. Cut down debt
We understand that not all students are going to have the monthly income they need to save and pay off student loans and/or credit card debt. Our advice, don’t wait till you are done with school to start paying them off! The sooner you can get those taken care of, the sooner you can put that money towards your future.
Nathan Grant, a credit industry analyst, recommends learning more about your credit cards. Do they have high-interest rates? What is the late fee? How much money is on each one? Once you have these answers get them paid off. Ensure that you are paying the bill on time so that you aren’t getting charged extra for late fees. Shobin Uralil, co-founder and COO of Lively states, “Falling behind on payments can make a mess of your financial life for years.”
“It’s easy to use credit while in college, but it can really set you back financially and hurt your creditworthiness. You can end up paying a lot of interest on the money owed.”
Whitney Nash, Financial Advisor at Nashional Financial
4. Plan for your future
Who is going to take care of your future if you don’t? Take action! If you are unfamiliar and/or confused about Roth IRA’s, investing, or compound interest, Sandy Wong, author of The Money Master, suggests that you take advantage of the library by checking out books on investing. She also suggests listening to podcasts or researching it online. There are so many resources available to help you learn how to plan for your retirement.
Founder and CEO of HopeTree Legal Funding, Jesse Harrison, advises enrolling in a financial class while you are still in school. Tackling an extra course may seem overwhelming but in the long run, you will have a better understanding of your financial goals and how to achieve them. Utilize the resources the school has for you to learn about finances and investing.
“The number one piece of advice I would give to college students is to start creating a financial plan now. This plan should include your short and long-term financial goals.”
Jerry Brown, founder of Peerless Money Mentor
It is a lot to think about when retirement seems so far away. Look at your grandparents, how are they doing financially? If they are enjoying retirement, ask them how they got there. Learn from those who have achieved success. Those who don’t have money saved often find themselves with a reverse mortgage, slowly selling their house to the bank in order to make ends meet.
Overall, the main takeaway is to learn how to save. Whether that money goes into a Roth IRA, a savings account, or under your mattress, learning to save now will greatly benefit your quality of life in the future.
- Learn to save.
- Pay off credit card and student loan debt as soon as possible.
- Limit or get rid of credit cards.
- Utilize financial planning resources available at your college or university.
- Live below your means.