A great saving strategy for the long term can be summed up as, “Save early and often.” Why do we hear the advice so often that it pays to start saving early? The key: compounding. Dividend or interest compounding is simply the idea that, as our savings earn interest or dividends, those earnings are added to our total, and the next dividend is calculated on our new total. As a simple example, say you invested $100 at 2.5% interest. When your interest is earned, you’ll add $2.50 to your $100, for a new total of $102.50. Then your next 2.5% interest is on $102.50, which is $2.56, added to $102.50 is now just over $105, and so on. If your account compounds monthly, the total is updated every month, and you earn more as you go. 

To add to this strategy, we recommend in addition to your initial savings, that you add to your savings every month. Once again, the earlier you start the more months you have to save, and the more your savings will grow. As your life and career progress, the more you might earn enabling you to save more every month. All these factors can add up over time, with positive results. 

Our graphical example shows that if you start at age 20, with even with a small initial deposit and relatively small monthly contributions, a smaller investment can yield you more over time than if you waited until you were 40, with a much larger deposit and twice the monthly contributions. 

When Should You Start?

Everyone’s life is different, but the rule is to save as much as you can, as soon as you can, and keep up with your savings. Over time, compounding will reward you. Learn more about our Savings Account Options, and Save Smarter. 

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A Simple Rule for Long-Term Savings

What is the 50/30/20 budget rule? 

This simple, effective guideline, which has become more popular recently, can make managing your savings less stressful, and help keep your finances on track. The rule suggests dividing your (after tax) savings into three parts using that proportion 50/30/20. Spend 50% on your needs, spend 30% on your wants, and put 20% into long-term savings. This guideline is just that: a guide. You can adjust it as needed.

50% For Needs

Your needs are the expenses that “keep the lights on” and keep your life running. The necessities. Most bills fall into this category, including rent or mortgage; transportation, including car loan or lease payments; food and groceries; home, auto, health, and life insurance; medical expenses; utilities; and debt payments. Note that this doesn’t include entertainment or expenses like eating out. Some needs are not regular expenses, but may come up at some point in the future, like a new vehicle purchase, or major house repairs.

30% For Wants

Your wants include all the money you spend to make yourself happier or entertain yourself, outside of survival expenses. Non-essentials. Expenses like eating out, movies, sporting events, hobbies, vacations, or new clothes or décor that you don’t especially need to replace. There is often a fine line separating your needs and wants. It can help to list both in a responsible way, and make sure you know the difference between what you truly need, and what you simply want.

20% For Savings

Savings and investments would then receive 20% of your income. This can include a highly recommended emergency (or “rainy day”) fund, savings for eventual needs like your kids’ college, and longer-term investments like a mutual fund or IRA for retirement. While debt payments are considered needs, if you can, it’s recommended that you make extra payments or higher-than-required payments, which reduce your principle or total interest on a loan. This can be considered savings as well, since it reduces your future expenses. A great way to keep your savings growing is by automatically depositing or transferring your 20% to the right account from each paycheck. Another way to save automatically: participate in your employer’s 401K or IRA retirement plan (or start your own), especially if your employer matches any part of your deposit.

Embrace Change

Think of this guide as flexible, and adjust it to your lifestyle, current income, and debt. As your circumstances change, you can adjust your percentages. It’s a great place to start if you’ve always wanted a simple budgeting tool. 

When you’re ready to Save Smarter, start by learning more about all our savings options. 

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“Compound interest” is an important term to be familiar with. Let’s say you’re in your early 20’s, just graduated from college, and got a job making roughly $35K. You save about $5,000/year for retirement. Let’s say you do this for 10 years, saving a total of $50K. Then something happens, you have a life change and end up not contributing any more to this initial savings. Your existing savings will still continue to grow until you retire when you’re 65.

Now let’s say instead, you were unable to save right away. But at around 40, you had a secure job making roughly $75K, and then you can start to save. So you save $10K/year for 10 years, saving a total of $100K. At 50, you have a life change and cannot contribute any more. But your initial savings grow until you retire at 65.

In both scenarios, let’s say your investment grew at 10% per year. At age 65, your totals would be very different. The “you” who started saving in your early 20’s would have a little over $1 million to retire. The “you” who started saving at 40, even though you contributed more, would have only a little more than $500,000.

Why? Time.

Investments take time to grow, and the longer you have, the better. So even if it doesn’t seem like much, it’s better to start saving even a little now, than waiting to save more later.

For young kids, saving can be simple and fun. A great way to start is with clear jars, so they can watch their money grow, and learn good financial habits. An easy way to do this is to create “Save”, “Spend”, and “Donate” jars.