Not only is it possible to save money during your college years, but saving is also the foundation for a sound financial future. Having student loans and a limited budget may make saving money during school seem unrealistic. However, with some practice and discipline, you’ll be able to start putting away some savings each month for your future money goals. College is one of the best times to form responsible savings habits that will benefit you long after you graduate. Here are six strategies to help you start saving.
1. Save early and often
When you’re young, you might not have a lot of excess money to put towards your savings, but saving early can allow you to take advantage of years of compound interest. Each year that your money is in a savings account, you earn interest on that money. Compound interest is when you earn interest on the money you've saved as well as on the interest you've earned. Essentially, the principle of compounding is earning “interest on interest”. (See SEC's compound interest calculator to see how compound interest works.) Although this method takes patience, saving early and often can set you up for future financial success.
2. Set up an automatic payment—to yourself
When you create a budget, you should think of your savings as another monthly bill. Just like you plan for expenses like rent or electric bills, you should budget for your savings. Instead of paying someone else, you would be paying your future self. Try committing to saving a certain amount each month, even if it’s only a few dollars. Then, you should set up an automatic transfer to a savings account. This way, you won't be tempted to spend the money in your checking account. Online banking makes it easy to automate your savings and ensures that you have a little financial cushion without having to actively manage your savings.
3. Create an emergency fund
If you don’t already have an emergency fund, your first savings goal should be to create one. Emergency funds are typically held in a savings account. This money is set aside to ensure coverage for financial crises without causing an extreme change in your daily life and budget. Your emergency fund can help you pay for car repairs, medical bills, and other unexpected costs. One of the purposes of an emergency fund is to prevent you from charging unplanned purchases to a credit card if you don’t have the ability to pay back the debt. You should consider making a goal to put aside three to six months worth of rent and expenses in your fund, but even one month is a good start.
4. Establish some short- and long-term savings goals
While in college, you might not be ready to start saving for retirement or a house, but you will want to save for other things. Once you've established your emergency fund, start to identify your financial goals and how long it will take you to reach them. For example, you might have a short-term goal of buying a new phone in six months. You also might have long-term goals of studying abroad in two years or starting graduate school in six years. Defining and separating your goals can give you a clear picture of how much and how long you will need to save in order to meet each of your goals. Some people may even open a separate savings account for each goal.
5. Make it difficult to access your savings
Throughout your college career, you might be tempted to rob your savings account for many reasons. It’s crucial to avoid spending your savings on anything other than its intended purpose. The longer your money stays in the account earning interest, the faster it will grow. You may consider keeping your savings at a different bank than your checking account. Whatever the method, making your savings difficult to access means you’ll be less likely to withdraw or transfer the money.
6. Choose the right kind of savings account
Savings accounts have different interest rates, service fees, and rules. Some accounts are better for long-term savings than others. Becoming knowledgeable about the different kinds of savings accounts can help you grow your savings faster.
- A regular savings account earns the lowest interest but offers easy access to your money. You can withdraw cash and transfer funds into your checking account. A regular savings account is best for an emergency fund because you want to be able to withdraw the money easily with no penalties.
- A money market account typically earns more interest than a regular savings account, but it also has higher balance requirements, ranging from $500 to $10,000. You can usually access your money with a debit card and write checks from the account, but if your balance goes below the minimum, you'll be charged a fee.
- A certificate of deposit (CD) usually has the highest interest rate of all savings accounts, but it also has more restrictions. Mainly, you can't withdraw the money in a CD for a certain period of time (called a "term") without a penalty. Terms can range from three months to five years, with longer terms paying the highest interest. Minimum balances range from zero to $2,500. CDs and Money Market accounts are best for saving money you don't plan to use for several months or years.
In college, having a savings plan and practicing financial discipline may not be the most glamorous lifestyle. However, college can be the most formative time for your finances. Proper saving now will allow you to solidify good money habits for the future, such as retirement planning. Following these six ways to save, you’ll find that saving money for the future doesn’t have to be a grand act. It can be as simple as smart shopping at the grocery store or just limiting your purchases. It doesn't matter if you start with $5 or $500; as long as you start to save, you’re setting yourself up for a sound financial future.
📅Plan ahead by checking out What 20-Somethings Need to Know About 401(k) Retirement Plans.
🔮Need other ways to save for the future? Check out What You Need to Know About 529 College Savings Plans!