Step #1 begins with saving your money. It doesn't matter how much as we all make different amounts, but this is going to be key to beginning on your journey of building wealth. Whether that's establishing just the habit, the amount initially does not matter. It's also acceptable to not have a goal in mind just yet, but strengthening and practicing this habit is your starting point.
Establishing a goal is important to provide yourself direction here. The consensus within the financial community on beginning your savings step is to start by building your emergency fund. This is by definition an amount of money you have saved that is easily accessible (liquid) to you to help you address any unexpected expenses that may arise. This amount may vary depending if you have a family, multiple assets or liabilities, but generally this amount could be anywhere from just below $10k and over. It will provide you with security and financial backing to weather any major events. For example, an unexpected medical, car, house, job change or moving expenditure. This will be a piggy bank on your shelf that you keep for a rainy day when you may need it. This should be your starting point and focus initially.
So how do we get here?
Well this happens one of two ways. We can increase the amount of money we bring in or we can decrease the amount of money we spend. Let's focus on what we can control at this moment and I would argue that to be what we spend. So what are some major controllable expenses we have in our life? Rent/mortgage, car payment, food, utilities and other bills.
Rent.
Throughout most of college and for the next 4 years after graduating I had lived with a roommate. This helped me build wealth a lot more early on and allowed me to save and invest. This also takes advantage of compound interest. Reasonably, living with another roommate after college was easy to do as I was use to it from college and still being young. I didn't know any better for having my space or potentially owning my own house for example. So this isn't a challenging transition and should be utilized more often. Most of my recent college graduate coworkers were not doing this and did not split rent or utilities with a roommate. Their rents were around $900-$1200 monthly, while mine was $450 a month. Utilities like water ($60/month), electric ($75/month), and internet ($60/month) were all shared (roughly $200 total per month). That gave me a monthly savings of $550/month at least, or an extra $6,600 a year. We could also share furniture, streaming services, food and our time. So I'm shocked to find that more people aren't cashing in on this incredible opportunity. I had also viewed around ten different apartments before settling on the one I chose which happened to be more mid ranged. This wasn't a downtown unit with luxury furnishings and amenities of new finishes, stainless appliances nor an available swimming pool or weight room. However, this decision did shave off a few hundred from our monthly rent. It was still spacious with large rooms, multiple windows, unoffending finishes and interior and a vaulted ceiling as it was on the upper floor. But let's run the numbers behind this decision. Over four years this annual savings of $6,600 grew to be over a $25,000 decision. That's also not including the return on investing these savings over this time period. This is a conservative $30,000 decision that I made early on. So here is one of your major controllable expenses that will allow you to save more money.
Food.
Shopping at Aldi or buying in bulk anywhere will give you some extra savings that can add up. Personally, I ordered multiple 25lb bags of rice throughout college that could be stretched pretty far. Oatmeal, eggs, beans and frozen veggies are also some great examples of cheap and healthy choices. You don't have to skim on buying food to save money, but you will get some payback if you pay attention. Most important to saving money here will be watching your restaurant expenses. $5 coffees, bar tabs and restaurant pricing will add up quicker than you think. And if you have a bad habit here it could prove to be hundreds of dollars of savings a month.
Car.
Not everyone is fortunate enough to have your parents provide you a car when you're 16, but if so I'd drive that car into the ground and keep a car payment off your books for as long as you can. If you're in the market for buying a car yourself I'd look at reliability and gas mileage as top metrics. Toyota/honda/mazda would be near the top for me. A smaller car like the civic, corolla or mazda 3 would be my choice too. Stay away from trucks and SUVs. Their repair and replacement parts are higher in cost and their gas mileage is also higher. A $400-500 car payment can really add up and take away from your budget.
So what's our takeaway here? Live below your means however you can and as early as you can. Give yourself the opportunity and gift of compound interest and starting your investments early. It's shocking how much of a difference a few thousand in investments can make during your early 20s. Let's take a look at this in the next post for Step #2: Investing.