Better Start Saving Now!

Two installations of advice for graduates written by New York Times Columnist Damon Darlin:
Your Money: Advice to All You Graduates: Let's Start with That Daily Latte...
Your Money: More Advice Graduates Don't Want to Hear

...Better kick that coffee habit before I graduate huh....


Advice to All You Graduates: Let's Start With That Daily Latte . . .
By DAMON DARLIN
Published: June 10, 2006

This is the season for giving advice to graduates as they enter the workplace. Instead of listening to yet another recitation of the usual admonishments to "change the world," "carpe diem," or "wear sunscreen," those graduates — unless they are already trapped on the nonpaying internship hamster wheel — need to hear how to manage their paychecks.

College graduates may thank mom and dad, top left, for helping with tuition, but they still need advice on how to handle a paycheck. Small steps — packing your own lunch, for example — can make a big difference over the first 10 years of a working life.

Parents may have tried this. And many will undoubtedly send this article to their children.

But, dear graduate, before you wad this up and toss it next to the keg still sitting there from last week's party, consider this: If you think it is tough living on very little now, imagine what it will be like when you are old and sick.

Surveys say most of you already suspect Social Security will not be around after mom and dad deplete it sometime during your peak earning years. A recent survey by the Pew Research Center found that 61 percent of Americans 18 to 29 years old favored a system of privatized retirement savings accounts.

Let's start with the easy stuff first.

Make your own coffee You probably know you spend a lot at Starbucks, a company that collected $6.4 billion from coffee drinkers last year. You probably don't have any idea how much of that total came from you. A calculator at www.hughchou.org/calc/coffee.cgi let's you figure that out and also forecast how much you will spend over a decade of coffee breaks. (This Web site contains a treasure trove of financial planning calculators.) Say you spend just $3.50 every workday for your latte. If you drank the free office brew instead, you'd have more than $11,500 to play with after 10 years.

Does coffee shop coffee taste better than the free stuff? Probably, but ask yourself, do you want to live in a roach-infested studio apartment with two roommates your entire life?

By the same logic, if you smoke, now is a good time to quit. Doing so will save you on average $25,600 over 10 years.

Learn to cook Unless you have learned the art of sneaking into conferences at hotels to snag a breakfast croissant or cocktail-hour shrimp, you need to reduce your dining budget. A twice-a-week kung pao chicken takeout habit can easily drain you of about $10,000 over 10 years.

At the very least, learn how to pack a lunch. Taking your lunch to work may seem like the equivalent of sitting with the nerds in the school cafeteria, and going out to lunch with colleagues can sometimes be a smart career move. But bringing your lunch lets you be more choosy about who you are eating with and saves money. How much? Back to the online calculators (www.hughchou.org/calc/lunch.cgi) and you'll discover that the savings could be as much as $23,000 in 10 years.

The tally so far: $34,500 (for the nonsmokers), or enough to make a down payment on a $172,500 house. That won't get you much in most big cities, so you really need to exert yourself.

Pay yourself first If you do everything suggested so far, you haven't had to sacrifice much except perhaps a regular lunch with the office jokers. Now, prepare to sacrifice.

Set aside 10 percent of your paycheck in a savings or brokerage account separate from where the rest of your money goes. You'll be less tempted to spend it if it is hidden away there, unattached to a checkbook or an A.T.M. card. If your employer has direct deposit of paychecks, your paycheck can probably be directed to different places.

Here comes the tough part. You are going to squirrel away this money in addition to the pretax money that you take out of your paycheck to save in the company 401(k). Only 31 percent of workers 18 to 25 participate in a tax-deferred 401(k) retirement plan, according to a recent survey by Hewitt Associates, an employee benefits consulting firm. The others undoubtedly assume that they'll get to it later. About two-thirds of workers 42 to 59 have money set aside in a 401(k).

There is an important reason you want to start early, even though it hurts. Say you withhold $375 a month for your 401(k). In 40 years, you'll have $750,000. But those who waited a decade to get started would have only $377,000.

And guess who delayed? Mom and dad. The average amount in a 401(k) is less than $60,000, according to the Investment Company Institute, a trade association of retirement fund companies. Generation X isn't in any better shape. A study by the Center for Retirement Research at Boston College found that 49 percent of those born from 1965 to 1972 won't have enough money at retirement to maintain their standard of living.

Another bit of advice: Stick the money in the broadest stock index fund offered by your plan, not bonds and not a money market fund. Sure, the markets may stumble at some point during the next 45 years, but history has shown that they will rise over a period that long. You take risks when you are young.

Ignore your raises Every time you get a raise, and you'll get them because you are working hard instead of spending money you don't have, pretend you didn't get one. Bank the entire amount.

Over time, you'll start spending the money. It's human nature. But you'll start spending it more slowly. You'll keep the car another few years. You won't immediately move to a new apartment. All that helps money to accumulate.

By this point, you may be screaming: "I can't afford to do this. There will be nothing left for me to live on. Have you seen my student loans?"

A few words about those loans. The government will make its annual adjustment of interest rates on existing student loans on July 1 to reflect recent increases in all interest rates. Consolidating your loans at a fixed rate to lock in a lower interest rate is one possibility, but you need to calculate if the longer time frame of such loans — and the greater overall interest payments — offset the savings from the lower interest rate. (You can't consolidate consumer loans or credit card debt with the student loans.) You can always pay a loan off early once your salary increases.

Now, back to the hectoring. Having less to spend can help you spend less on frivolous things and save for worthwhile causes. Having less will also make you work harder to get more. If you are comfortable, you get complacent.

Don't borrow to buy depreciating assets Almost every consumer product from an iPod to a sofa is worth less the moment you buy it. You are just paying extra for it with a loan. Borrowing, by the way, means taking out a loan, buying it on installment or using your credit card when you don't have the money to pay off the balance. If you can't afford it, don't buy it.

An exception is a car, which may be a necessity that would be out of reach otherwise. One option to consider is a used car coming off a dealer's lease. They tend to be driven carefully and there are a lot of them thanks to recent incentives from manufacturers. Keep the term of the loan short to minimize cost. The latest edition of the Consumer Reports "Buying Guide" lists the most reliable used models, including the best ones for less than $6,000 like the 2002 Saturn SL sedan and the 2000 Toyota Echo. The guide also includes the less reliable models like the 2002 and 2003 Mini Cooper and the Volkswagen Beetle from 1998 through 2004.

Protect your credit Eventually you will have to borrow money for a car or a home. If you want to pay as little as possible in interest, you want pristine credit. So make yourself a credit card company's worst customer: pay your bills on time and never carry a balance. No exceptions. To help avoid temptation, use no more than two credit cards. Try to find one that gives you rewards — airline ticket rewards or cash — for using it, but still won't charge a fee for that privilege.

Another technique to cut down on incidental expenses is to train yourself to use the A.T.M. only once a month. Take out enough cash to get you through the month, and when you run out of cash near the end of the month, stop spending. Don't grab for the credit card.

Now go out and seize the day. And wear sunscreen.

More Advice Graduates Don’t Want to Hear
By DAMON DARLIN
Published: June 2, 2007

Last year at this time, as college graduates walked out into the world, I wrote a column giving advice on how they could save money.

In droves, parents sent the column to their children. And some of those children wrote to me to vent. What I suggested was impractical, many said. How would you like to try to live on $40,000 a year in Washington or San Francisco, several asked.

What I was proposing was not radical. It was mostly the simple things my mother had drummed into me. It was advice like diverting 10 percent of your income to savings before anything else and ignoring raises and putting them into savings, too. Learn to cook, I said, and never borrow money to pay for a depreciating asset.

I also suggested cutting out the latte habit, which was my symbol for those little things in life that when turned into a habit, add up to money that could have been spent on something worthwhile and memorable.

Other people, my wife among them, pointed out that I may have been too draconian on that point. Consistent savings is a lot easier if there are small rewards along the way; otherwise, life seems as if it is just one bowl of cold grass porridge after another.

Fine feedback, indeed, and my wife’s counsel reminds me that I should have added one other bit of advice: find a partner and stay together. Study after study show that two can live more cheaply together than each alone and that divorce is the great destroyer of wealth.

But, dear graduates, the crux of the advice is still compelling. While there may be a debate among economists about how much 50- and 60-year-olds should be saving for retirement, there is little dispute about how much the young should save: more.

Saving while young is critical. It isn’t just because of the power of compounding. By that I mean that if you start saving now it will build to a larger nest egg by the time you are 65 than if you wait to start at 45. Or to put it another way, you can save a smaller amount now rather than a larger amount later.

Bank $250 a month for 40 years in a I.R.A. or a 401(k) and you will receive about $500,000, assuming a 6 percent return. Start at age 45 and you would have to put in $1,078 a month to generate the same amount by age 65.

But there is another compelling reason to get into the habit of saving. (Here is where this column also turns into advice for the older folks who are giving you this to read.) People who save a lot get used to a lower rate of consumption while working, so less money is needed in retirement.

Stretching to save a little more yields a double dividend. You accumulate more assets and you lower the amount you will need in retirement because you will not have the habit of spending extravagantly to feel fulfilled.

Inevitably though, we return to the question: How can you possibly afford to put away that much? If you are only making $40,000, a not-untypical starting salary for a college-educated professional in a big city, the weekly gross of $769 works down to $561 in take-home pay after income taxes and payroll taxes for Social Security and Medicaid.

Were you to divert 10 percent of your salary to a 401(k) plan, the bottom line becomes $509.

In other words, a regular habit of savings costs you $52 a week. You easily frittered that away last week on things that you cannot even recall this week. A useful exercise that proves the point: For a week, try to list everywhere you spend cash or use your credit card.

Could you save another 10 percent a week, or $50? If you do, you are nearly set for life.

Can you live on $1,950 a month? Rents being what they are in certain cities like New York, San Francisco or Washington, sure, it will be tight. People do it by finding a roommate and watching their expenses (or asking for an occasional handout from Mom and Dad).

There may be another compelling reason to save and that is that while many aspects of retirement savings are predictable, the big unknowable is health care costs. “If you believe in the logic of the life cycle model, then once you get used to peanut butter, all else follows,” said Jonathan Skinner, a economics professor at Dartmouth College who has studied retirement issues and recently wrote a paper titled “Are You Sure You’re Saving Enough for Retirement?” for the National Bureau of Economic Research. “That’s the assumption that I am questioning: Do people want to be stuck in peanut butter in retirement?”

He said he came to the conclusion that a strategy to reduce retirement expenses “will be dwarfed by rapidly growing out-of-pocket medical expenses.” He noted projections based on the Health and Retirement Study, a survey of 22,000 Americans over the age of 50 sponsored by the National Institute on Aging found that by 2019, nearly a tenth of elderly retirees would be devoting more than half of their total income to out-of-pocket health expenses. He said, “These health care cost projections are perhaps the scariest beast under the bed.”

As Victor Fuchs, the professor emeritus of economics and health research and policy at Stanford University, told me, money is most useful when you are old because it makes all the difference whether you wait for a bus in the rain to get to the doctor’s appointment or you ride in a cab.

“Saving for retirement may ultimately be less about the golf condo at Hilton Head and more about being able to afford wheelchair lifts, private nurses and a high-quality nursing home,” Professor Skinner said.

His best advice for people in their 20s and 30s: maximize workplace matching contributions, seek automatic savings mechanisms like home mortgages and hope “that their generation can still look forward to solvent Social Security and Medicare programs.”

Over the last two years I’ve been dispensing advice in this space about how to spend and save more wisely. This will be my last column for a spell as I am taking on editing duties that give me little time for reporting. But before I go, I want to remind the young graduates, their parents who scrimped and saved to get them there, and anyone else who stuck with me this far that are a few other rules of life worth considering.

Among them are the following. Links are available at nytimes.com/business:

¶Never pay a real estate agent a 6 percent commission.

¶Buy used things, except maybe used tires.

¶Get on the do-not-call list and other do-not-solicit lists so you can’t be tempted.

¶Watch infomercials for their entertainment value only.

¶Know what your credit reports say, but don’t pay for that knowledge: go to www.annualcreditreport.com to get them.

¶Consolidate your cable, phone and Internet service to get the best deal.

¶Resist the lunacy of buying premium products like $2,000-a-pound chocolates.

¶Lose weight. Carrying extra pounds costs tens of thousands of dollars over a lifetime.

¶Do not use your home as a piggy bank if home prices are flat or going down or if interest rates are rising.

¶Enroll in a 401(k) at work immediately.

¶Postpone buying high-tech products like PCs, digital cameras and high-definition TVs for as long as possible. And then buy after the selling season or buy older technology just as a new technology comes along.

¶And, I’m sorry, I’m really serious about this last one: make your own coffee.