Unable to Save: Why Young Americans Aren’t Saving Money, And What They Can Do About It

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We’ve all seen the statistics regarding savings and retirement, and if you haven’t…well, you’re not going to like what you see.  Simply put, people are not putting away enough money at an early age to ever reach some semblance of financial independence, let alone a comfortable retirement down the road.  In the chart above, we see the median household retirement balances for those who have started retirement-specific accounts, and those who have not.  Not taken into account is the actual net-worth of these households, which would look particularly dreadful for the 25-34 age bracket and 35-44 age bracket due to mortgage debt, credit card debt, and of course student loan debt.
But enough focusing on the past.  Many of you reading this are either experiencing this situation right now, or have seen that this is the direction you are heading in.  The good news is, it’s never too late to change the way you’re living, solidify your retirement accounts, and be in control of your financial life.  And for young Americans, while you have more debt incurred by 25 than at any other time in history, you can start developing money-saving habits and debt-destruction at the same time.  Before I go further, let me reiterate that last point… You know, the part in bold.  When I said you “can” start saving and ridding yourself of debt at the same time, what I really meant is you “must”.  In order to set your financial habits into motion, you need practice.  Lots of practice.  So we’re going to learn by doing, and I’m going to outline a strategy that has worked for me, as well as thousands of other young adults.

What we’re up against

According to a Fidelity survey of 750 recent graduates, in 2013 the average college-related debt incurred by new grads was $35,200.  Let that sink in for a second.  Ok, now sorry in advance, but it gets worse.  Of that $35,200, $26,000 were government loans.  This means that at a rate of 6.8% (which is the new standard), new graduates will be paying $9,905 over the course of 10 years in interest alone.  This brings the total up to $35,905 + $9,200 = $45,105.  Now let’s factor in credit card debt, which according to the survey averaged $3,000.  For the sake of argument, I’ll give our students the benefit of the doubt and start this out at 10% interest.  And honestly, that’s being very generous for most people in their early 20′s.  If you pay well over the minimum payment, you can have this taken care of in 35 months, which $467 in interest paid.  Last, there were no breakdown for private and family loans, so we will cut our new graduates some slack and put their interest rate at 0% for the final $6,200.  Our grand total for the amount of money spent towards school debt by age 33 is…
$54,772
Compare this to the average student loan debt incurred in 1990, where only 46.2% of students took out loans, and averaged $15,375.00 in 2013 dollars.  So let’s go back to our fancy chart at the top.  By the time our new grads pay off their debt, they be close to that “35-44″ bracket.  Except instead of having $31,000 saved (best case scenario for the median family), they will have spent over thirty-thousand dollars more than their predecessors due to college debt alone, totally eliminating whatever retirement savings they could have had.  This is why our generation is in dire need of more refined  financial advice than those who came before us.

So what can we do about it

As I mentioned earlier, we have to have a plan.  This plan includes assessing your current situation, cutting out the fat, developing a debt repayment strategy, and building solid financial habits.

Step 1: Find out where you stand

If you are still in college and do not know how much money you currently owe, find out from your student loan provider asap.  If you have no idea who your provider is, you can start out by calling or emailing your schools financial aid office.  They should be able to point you in the right direction.  Otherwise you can look over the loan papers you signed at the beginning of the school year.  Also, if your parents were helping you with the loan process, make sure you account for any private loans that they may have co-signed with you on.
If you are a recent graduate who already has a grasp on what you owe (I’m pretty sure I got my bill before I even got my diploma…), then it’s time to start creating a budget.  Whether it’s excel, mint.com or YNAB, you need a way to track where your money is going if you want to have a chance at reallocating anything towards saving and debt repayment.  Saving does not happen by accident, ever.  Mint.com is great for beginners because it automatically pulls transactions from your bank accounts and breaks down spending into pretty charts.  Everyone likes pretty charts.  After the initial setup (and subsequent recovery from the shock of seeing how much you really spend on frappucinos…),  you can set stricter budget limits for the different spending categories, and voila, your money will magically go into savings!  Well not quite.

How to effectively budget

There is a method to the madness when it comes to budgeting.  Start by listing your fixed expenses and their costs, for instance:
  • Rent – 300
  • Car payment – 150
  • Car insurance – 100
  • Loans and other debt- 500

So right off the bat we have $1050 that is strictly allocated and cannot be easily lowered without a serious life change.  We will consider them static for now.  Next, find out how much you are spending on variable cost categories and try yo cut them down as much as possible. Are you spending $200/month on gas? Car pool or take public transit.  Are you eating out 5 nights a week, or every day for lunch? Have ‘lunch making parties’ with friends at the beginning of the week where everyone prepares something for lunch or dinner. There are ways to save money on literally everything, the sky is the limit.  The important thing here is to stick to your guns and stay within the limits you set for yourself.  Below is our budget for variable cost categories

  • Food – 250
  • Gas – 100
  • Household Items – 50
  • Entertainment – 200
  • Phone – 50
  • Internet – 20
  • Utilities – 60
  • Misc (10% of net) – 220

Last, don’t under budget for entertainment.  This will include, things like eating out once a week, netflix, going out for drinks once a week…all things that will help keep you sane while you’re working hard the rest of the month paying down that debt .  However, it will have to be reduced until your debt and savings emergency is resolved.  If you don’t have money left over to throw at your loans and savings by the end of the month, then cut down even more, or reconsider your car and living situation as those take up the bulk of your spending.

Our monthly budget now totals $2000 (how convenient!).  We will come back to this budget later, but first…another reality check.

Step 2:  Have a plan

Americans have a compulsion to spend, whether it be on nice cars, bigger houses, or even the peace of mind provided by being debt free. But even if someone pays off all of their debt, what’s stopping them from spending themselves into the same position they started in? The answer is controlled saving habits. If you are one of the millions of Americans who are paying everything they can to school debt and pushing off saving until times are a little easier, then stop right there. Student debt is a huge crutch but for most it is not the toughest financial crisis they will ever face. By learning to save now, you will be protecting yourself from financial emergencies, and providing yourself with the ability to pay cash for your next car, put a 20% down payment on a home, or pay cash for any other purchase you would normally take on debt to for. Below I outline “The Igloo Method” of debt repayment. It’s similar to the avalanche method, but it is the only option for sharpening your savings habits, developing an emergency fund, and stressing the importance of only buying things you have the cash for.

The Igloo Method

In this example, you are a new grad who has an income of $35,000/year, and $35,000 in college debt. Here’s the debt broken down by interest rate and amount:

  • Credit card @10% – $3,000
  • Federal Loan 1 @ 6.8% – $6,000
  • Federal Loan 2 @ 6.8% – $1,500
  • Federal Loan 3 @ 6.8% – $8,000
  • Private Loan 4 @ 7.5% – $10,000
  • State Loan 5 @ 3.4% – $6,500

As I stated earlier, we will be basing our initial repayment plan on the avalanche method. If you are not familiar with this method, it involves paying down your highest interest loan, followed by the next highest interest loan, etc. All the while lumping the payments together as you tackle the loans one by one. Except instead of rolling the entire payment into the next loan, we put 50% of that payment into a high-interest savings account (these usually have a 1% interest rate). By the end of our example, you’ll have a fully fortified cash-igloo to protect you while you’re paying down loans, and set the foundation for the rest of your financial life. I’ll even break down the main drawback, which is the extra interest you pay in exchange for this cash. Last, I’ll show you how much you stand to save over the course of your working years by maintaining the exact same principles we practiced during debt repayment.

Let’s start with your budget from before. With an income of $35,000 per year, you stand to net around $2187.50 after taxes. Subtract the amount we budgeted for the necessities and you’re left with $687/month to pay towards your loans. With the Igloo Method, we will almost always consider the highest interest loan to be a debt emergency, and therefore all of our extra money will go towards paying it off as soon as possible. After that debt has been eliminated, we commence the “igloo building phase”.

igloo method

(click to enlarge)

Now for the results.  To the left I’ve attached a breakdown of the payment amounts for each loan, the total interest paid, and the months it took to pay it off.  The total repayment time for your debt was 70 months, which is already greatly reduced from the original 120 month schedule you would have been on had you not adopted the igloo method.  Also listed is the total amount of interest paid,  which we will see later on is comparable to both the avalanche and snowball methods.  Last, (and here comes the fun part!),  you’ve managed to save over $7,000 while staying ahead on your debts.  Very cool!

igloo method

(click to enlarge)

As you can see from the graph to the right, our savings starts off modest, but it picks up quickly as we tackle each debt one by one. And remember, the savings you’ve accumulated at the end of the repayment plan isn’t the only benefit you receive from the Igloo Method. You are left with a growing security blanket while your financial life is in it’s most fragile state. The last thing you want during debt repayment is a catastrophe that throws your further into debt, such as your car breaking down, your water heater needing replacement, home maintenance, you name it. You will always have the cash on hand to keep driving towards your goal of debt freedom, and later on financial independence.

Now we crunch the numbers. In just 70 months, you’ve paid down your debt in less than half the time.  You’ve saved over $7,000, and all with a modest income of $35,000/year. There’s no magic here. No gimmick. Just hard work and determination from a seriously motivated individual.

The Breakdown

Over the course of those 70 months, you’ve paid $6,192.86 in interest from the your first payment to your last. To compare this to other debt repayment methods, the snowball method would have paid down the debt in 60 months and cost you $6,088.27 in interest, while the avalanche method would have paid down the debt in 60 months and cost you $5,614.36 in interest. And as I stated before, there’s more to this than just the amount of money you saved, or that you are now debt free. You successfully saved 6 times as much as the average american per year *while paying down $35,000 of debt*. You have developed a habit of saving that will stay with you for the rest of your life, which you can now apply to an early and successful retirement.

Conclusion

So I challenge all of you reading this to take the next step in your financial life. Don’t stop at just eliminating debt. Develop the necessary saving habits that will propel you towards financial independence, and if you are as passionate about taking control of your financial life as I am, I urge you to share this with everyone you know.  Also, stay tuned and subscribe so you can be the first to read about what you can do with your new found financial freedom!

If you have any questions regarding my methods, or if you want to get your hands on the formulas I used, feel free to leave me a comment and I’ll be happy to oblige.

-Amplivagant

2 Responses to “Unable to Save: Why Young Americans Aren’t Saving Money, And What They Can Do About It”

  1. […] for a place to start when it comes to assessing your current debt situation and creating a budget, then this is the next post for you.  Otherwise, don’t forget to share and subscribe!  I’d love to hear your feedback, so […]

  2. Way cool! Some extremely valid points! I appreciate you writing this write-up and also the rest of the site is also very good.

    Regards, Nicolas