Savings, Investment, and Spending – Simple Rules for Young Wage Earners

February 28, 2018
1155 Views

Entering the work force is a huge step for young people and is often seen as a rite of passage of sorts. Gaining independence and having more freedom with finances can introduce a new dynamic to life. The problem for many young people is how to spend money, particularly when it comes to getting the right ratio of savings, spending, and investments.

If you’ve recently started working full time and are now looking ahead to your future, then taking a serious look at your finances will help you to develop good habits that will create better security in the future.

How Much Should You Be Saving?

Financial advisors can have different ideas when it comes to specific figures, but generally you can expect to receive advice stating that you should save at least 10% of your paycheck.

Saving this amount is simple and you don’t need to immediately think about investing it into any type of long term fund. A high or moderate interest savings account will be suitable until you have more time to plan how the money would be used. The most important thing is getting into the habit of saving and ensuring that the money is kept separate from your day-to-day finances.

Increasing Savings as Wages or a Salary Increases

If you are career orientated, then the likelihood is that your income will increase over time. It’s natural to want to use the extra money to change your standard of living and start spending more on luxuries. While there’s nothing wrong with enjoying the money that you earn, you will still need to think about increasing your savings so that you will create more opportunities for investments later on (real estate, a first home, stock market etc.)

When your paycheck allows you a comfortable amount for saving, spending, and covering basic expenses, you should revisit the 10% savings rule.

The 50-20-30 ratio is something that works for many individuals.

50% of your income will go to necessary expenses like groceries, utilities, and housing costs. 30% of your income can be used for luxuries that aren’t included in your standard living costs. The remaining 20% can go towards savings, allowing you to build your wealth.

Why Are Savings So Important?

Getting into the habit of saving money early will allow you to develop a strong sense of financial responsibility. Savings can be used to cover unexpected one-off costs, the money could be used for new investments, or savings could be used as a deposit on a first family home.

Investment advice usually centers around an assumption that people already have money set aside. The reality is that many young people don’t start saving early, which is why the idea of investment can sometimes be difficult to relate to.

By saving early you will create more options for your future and you will be able to take advantage of investment opportunities when they arise. Starting small and slowly increasing your savings will reduce any significant impact on your lifestyle, and as your wealth builds you will experience benefits that the less savings-minded people simply won’t have access to.

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