Good Financial Habits Start Early

Getting into a regular savings groove starts with a single first step

Working at a job in high school may help form lifelong financial habits with a big payoff. Gretchen, a 40-year-old registered nurse, started babysitting and working at a grocery store when she was 15. She regularly put half of her paycheck in a savings account, along with any birthday or gift money she received from her parents or relatives.

Fast forward 25 years, and you may be surprised to learn that Gretchen’s savings paid for nearly half of her undergraduate college education. And the habit of saving at least 20% of her salary—putting half in a retirement savings account and half in the bank—helped her pay off school loans in less than 10 years, and put down a sizeable down payment on a condo.

Best of all, with $250,000 already socked away in her 401(k), Gretchen is confident that she will reach her goal to retire at age 67 if she keeps making contributions and increasing them every time she gets a raise.

Gretchen’s five top financial tips

1. Max out contributions to your 401(k). “Because this money comes out of your paycheck, you never see it, or miss it. Your 401(k) is probably going to be your biggest source of retirement income,” she notes.

2. Stay invested in stocks. Comfortable with investment risk and with a 25-plus year time horizon until retirement, Gretchen maintains an 80-20 allocation to stock funds and bond funds in her portfolio and rebalances once each year to make sure her stock or bond exposure doesn’t get out of whack. Please note, this may not be good advice for everyone. If and how much you invest in stock and bond funds will depend on how risk adverse you are, your time horizon, goals, etc.

3. Live within your means. Owning a modest condo with total annual expenses (mortgage, insurance, utilities and taxes) that add up to less than 28% of her gross annual salary, Gretchen lives under the 30% to 35% threshold that many experts advise.

4. Watch your “fun” spending. Gretchen frugally drives a 10-year-old car, has no debt other than her mortgage, pays off credit cards in full each month, and eats out only twice a month. “You’d be surprised at how satisfying it is not to shop just for the sake of shopping,” she says.

5. Build an emergency fund. Gretchen took 10 years to build $30,000 in an emergency fund. Kept in a low-interest taxable money market account, this money is easy to
   get to if she needs it, and it’s designed to last six months if she becomes incapacitated or can’t work.

This hypothetical case study is provided for illustrative purposes. Individual results may vary significantly based on your specific situation.