It’s been well publicized that the savings rate for middle-class Americans hovers around 0%. However, with an improving economy and rising wages, the reason for the paltry savings rate might not be lack of money.
It could be that even with all the legions of websites and books written about how to save, some people haven’t figured out why to save. For instance, viral poverty writer Linda Tirado recently mentioned in an interview that saving small amounts was pointless because even if she saved $5/week, the most she could amass was $260 at the end of the year, if she didn’t dip into it first. Tirado clearly hasn’t learned the value of saving but here are four reasons why her attitude is completely wrong.
The science has come in and you will obtain more happiness by buying experiencesoverstuff. However, I just don’t buy it (pun intended). I will admit that I’m guilty of a love for shopping and a love for stuff, but stuff needs a champion. The right stuff can make us happy. Consider the following.
You may have heard that old saying that the opposite of love is not hate – it’s indifference. Sometimes two ideas seem to be at complete odds with each other when they’re actually two sides of the same coin. Sometimes people think there are only two options – you either love or hate something – without realizing that there are other, perhaps better, alternatives.
Are you a Spender or a Saver?
In the same way, when people think about personal finance, their minds tend to go to one of two extremes as the only paths to take.
On one end, there is the shopaholic who’s never found a sale she didn’t like. The spender has no idea what she owns or what she wants. She keeps spending because no matter how much she buys, she is always left wanting. The perfect sweater, the newest jeans, a pair of shoes for every outfit. Her house is full but she never feels satisfied; she is always looking for something else.
On the other is the miser who pinches every single penny. The scrooge saves as her life’s calling but still fears that whatever she saves won’t be enough. She cuts necessities to the bone and rejects anything fun or generous. Charing her dinner guests for food. Neglecting friends in need. She finds excuses to avoid giving gifts. The scrooge’s house is empty and so is her life.
The Third Option
People often think the purpose of personal finance is to turn the spender into a saver. However, neither of these scenarios is ideal. The spender lives like there is no future and the saver lives like there is no present. Though the two extremes are different – they share a common trait that makes both these lives undesirable.
Neither have figured out when they have enough.
Knowing what is enough would enable the spender to see that she already owns enough clothes to last through several lifetimes. She has more cookery than Martha Stewart knows what to do with and her home was submitted to Hoarders International. New purchases just make her home more cluttered and her wallet lighter. She doesn’t need new purchases so much as to appreciate what she already has.
Knowing what is enough would enable the scrooge to find a reasonable savings goal for financial security rather than endlessly saving. Once the scrooge meets these goals, she could use some money to enjoy her life and to give back. Only then will the Scrooge finally be living a life of abundance rather than perpetual fear.
The Only Financial Lesson You Need
Those that have enough realize that money is merely a tool – it is not the end goal. Money should be used to make our lives easier and better. Our lives should neither be devoted to earning money nor enslaved to the debt caused by its lack. The ideal is not necessarily to have millions of dollars or millions of things but to feel that whatever we have, that we live abundantly. So the goal of personal finance is not to become a spender or a saver – the point is to find your “enough” and use money to get or stay there.
The definition of enough will vary with each individual’s desires and circumstances. No one amount of money or one lifestyle can suit everyone. If you’re a spender, you can keep shopping and if you’re a saver, you can keep a suitable amount in a bank account. You don’t have to change your whole personality in order to meet a personal finance writer’s definition of success. Personal finance is just that – personal.
What Happens If You Find Your Enough
Both sides need to know the endpoint. The spenders need to know when to stop and the savers need to know when to start. And both sides need to know when to quit – when to give up the rat race and retire. If you don’t have a clear end goal, then you could be chasing money for the rest of your life and never feel like you’ve made it.
Enough can mean a wealthy retirement abroad. It can mean spending time with friends and family. But if you don’t have an endpoint, you’ll spend your money chasing all number of possibilities – a new house, fancy car, designer clothing. If you don’t have a purpose for your money, it’ll find a purpose for itself. And you might not like where you end up. You have to first figure out and then focus on your end goal – and then you’ll be able to aim your desires and energies there.
There are plenty of articles that will tell you how to pay off your debt after you graduate, but it’s even better to have less debt. It doesn’t seem like you can do much of anything to improve your debt situation while you’re in school, i.e. earning more debt, but there you’re wrong. There are lots of strategies to decrease the loans you take out, and thus decrease your debt burden when you graduate. This also decreases the interest that accrues while you’re in school and paying off debts and reduces origination fees – so it saves you money on top of money. Here are the strategies I used to reduce debt while still in school.
I didn’t take out the max loans.
The max loans I could take for three years of loan school was about $180k, but I ended up with about $92k (and $20k of credit card debt). The problem with taking out the max loans is that schools overestimate the amount of loans they can give you because they don’t want you to run out of money. The problem with taking those extra “just in case” loans is that most people will use up the money they have just to use it up. You already have it so you might as well use it. And that’s how you get into more debt than you need to.
A better option is to figure out a realistic but frugal budget. You can add in a little extra for wiggle room but don’t take the max loans just because they’re the max. You can do better than that. Your future self will thank you for fewer loans that you will need to pay back.
I went to a cheaper school.
Not everyone has this choice, but it should be a consideration if you’re undecided between schools with differing tuitions. With in-state tuition, I saved about $5,000/year on tuition and likely $10,000/year in living costs compared with living in a big city. It’s not just that the cost of living was lower but it was much harder to spend a lot of money in a small college town than in, say, New York City. That’s $45,000 saved without doing anything at all. Plus, in law school, you spend a lot of your time studying – you don’t need the added distractions of a big city.
I shopped around for insurance.
I checked my checking account to make sure there would be enough money at the end of the semester. I read the fine print and bought private health insurance, rather than the school insurance. (This was pre-Obamacare so your mileage may vary). This move saved me $2000/year and gave me better coverage.
I treated loan money like real money.
Many make the mistake of treating loan money like Monopoly money. I treated it like real money and lived like a student. I did not increase my lifestyle and saved money where I could. I carpooled. Of course I bought used books. Used books are slightly inconvenient to use used books, but it’s the easiest way to save hundreds of dollars a semester as a law school student.
I brought my lunch and made bulk dinners on Sunday. If I went shopping, it was at Goodwill. I didn’t go on fancy vacations on borrowed money. This doesn’t mean that I didn’t have occasional splurges at nice restaurants. I preferred, however, to have a nice, memorable dinner with my boyfriend over numerous forgettable meals at the school cafeteria. Over the course of three years, these little tricks saved me thousands of dollars.
I made money in school.
It’s hard to work while you’re in law school your first year, but students tend to have more time 2L and 3L years. I worked at the library from my 2L to 3L years. During the summer, I took a better-paying side job. I made quite a low salary but the work was minimal at all the jobs. All the jobs also allowed me time to study (the benefits of living in a college town). Additionally, I met people and the few hundred bucks a month paid for my rent.
Having the additional money meant that I could avoid taking out new loans, which could save hundreds on origination fees and interest. Additionally, any income earned makes you eligible for the earned income tax credit when you file your taxes. If I had been a bit savvier, and had more money, I could have put some money into a Roth IRA and taken advantage of the market climb. You live and you learn though. I was happy to have the thousands extra from these side jobs and get the Earned Income Tax Credit.
I maxed out several 0% cards.
It’s anathema in the personal finance community to use credit cards. As a warning, if you cannot be trusted with credit cards, do not follow this tip. You could get into a lot of trouble.
But, I’m quite good with credit cards.Because I had excellent credit, I was able to get 0% interest on cards for 12-18 month periods with credit limits totaling $20,000. The cards had staggered end dates that were months after my starting date. That way they wouldn’t come due while I was still in law school.
It was nice to be able to float my expenses for a while. This tip didn’t actually save a ton of money but it helped keep my peace of mind and liquidity. I put my last two years of spending on credit. I made sure that I was ready to pay them off once I had a job. But I knew that I would get a job eventually and I didn’t run up the balances.
Paid tuition with money instead of loans.
I took four years off between college and law school, where I saved up money for law school on an entry level salary. The money I saved I put toward tuition and living expenses. As stated above, I didn’t take out the max loans but only what I needed to get by. Additionally, because I was able to pay for my living expenses in cash, I primarily took out federal loans. Thus, if push came to shove and I got a job that needed to rely on loan forgiveness, most of my loans could be forgiven under the plan. I wouldn’t have pesky private loans that I would still have to pay.
How I Saved Tens of Thousands While In Law School
Basically, I lived like a student, and I didn’t regret it. Though I graduated with over $90,000 in law school debt, and $20,000 and credit card debt (on 0% credit cards) I know it could have been much worse (I think the max was $180,000 for 3 years, not counting if you took additional private loans).
Part of the reason that I was so careful with my money is that I entered law school in 2009. Even though I went to a top school, we were told not to have high expectations for graduation. And I took to heart the possibility of having difficulty finding a job.
I think even keeping my law school loans below the six figure level put me ahead mentally (and of course, financially). I don’t regret any of it. The strategies I used in law school to save money made it exponentially easier for me to pay of my loans quickly and then, quickly start building my net worth.
Do you have any strategies for saving money in graduate school?
Paying for higher education is a huge issue these days. I knew I was on my own when it came to graduate education. Fortunately, I worked for four years in between college and grad school. I scrimped and saved and then cashed out my retirement account to pay for graduate school. I couldn’t find any articles that recommended this approach. I’m sure it’s a controversial way to do so but it worked out ok for me.
It was spring of my fourth year at college. I was barreling toward graduation with a job offer with the federal government. This was pre-recession so this was more or less average, instead of exceedingly lucky. And I, as a completely entitled millennial, pictured the next 30 years of my life working in a gray cubicle under fluorescent lights in this office.
And that frightened me (though I tell myself the sexual harassment was the bigger issue with that job). When one of my friends excitedly told me she was going abroad for a year with some of our mutual friends, I jumped ship at the chance.
An Inauspicious Start
I spent one year abroad, where I saved nothing, My first six months back in the States, I floundered about at temp jobs, making $10-20/hour, though I still managed to save because I was living rent-free with my parents. In my last six months, I was unemployed after having been laid off, though I still collected unemployment. But for a solid 2 years I was gainfully employed as a financial analyst. I hunkered down at the whole “being an adult” thing. This is not the start you would expect for someone who saved $65,000 for grad school in 4 years, making, at most, $44k annually.
When I was 21, I read about 401ks and retirement in the book Financially Fearless by 40 by Jason Anthony. I was appalled that I hadn’t started saving at the ripe old age of 22. My dad is an accountant! Why didn’t he warn me?
But my parents had always taught us the value of saving. I decided that when I was fully vested I would max out my 401k even while I was making $42k and then $44k a year. Because the 401k is pre-tax, I saved a bunch on taxes by maxing it out, and I still had enough money coming in my paycheck for a simple existence. With the company match, I was saving about $20k in my 401k. Then I saved $5k in my Roth IRA. On top of that I saved a few thousand into my savings account and had saved a few thousand before and after this job while working odd jobs. So that’s the basic arithmetic answer of how I saved this money.
The aggressive 401k contribution was a method of forced saving. After I made the election, I was far too lazy to do anything about it so I just had to adjust my spending. I benefitted from the tax savings, which came to an extra few thousand a year. Being a natural hermit and a scrooge also helped. I was paying $800/month in rent. This was a reasonable rent 10 years ago but is on the low end for the Washington, D.C. area now, though I still see rents this low. We didn’t have a TV or cable. The furniture was sparse – scrounged from a collaboration of my office’s discarded furniture, Ikea and this sweet Jennifer Convertibles sleeper couch for $200. (Selling that couch was a huge mistake).
How I Saved $65k in 4 Years
We ate at home and I can’t remember doing a lot during these two years though I do remember studying for the LSAT. I went to work and I went home and did logic puzzles and wrote essays. On the weekends we visited our parents. Note: this is a highly effective way to save money and be completely lame.
But the key was having the money withdrawn immediately. When my sparse paychecks arrived, that was all I could spend. And in fact, I didn’t even spend all of it. I think a lot of people may have worked jobs where they weren’t making bank right out of college. Sometimes people think, “I need to make $X before I can save money.” If $X is barely over minimum wage, then perhaps this person is correct. But I think for many people, even if we aren’t making that much money, saving small amounts of money is valuable. And making it harder to spend money is an easy way of forcing yourself to do that.
So I’m sure you’re saying, well you saved a lot of money for retirement. But how did you use that toward grad school?
Well, I liquidated most of my retirement savings to pay for grad school.
The Controversial Part – Should You Cash Out Retirement Accounts For Higher Education?
A financial adviser would say I was foolish for withdrawing from my retirement accounts to pay for school. I probably was. I’m not going to argue this was a smart thing to do. It was what I felt at the time was a good use of my money. (And to be fair, I did such a poor job of investing my money, it really hasn’t grown much even as the stock market has soared). I took out the max federal loans and paid the rest with savings and strategic withdrawals from my retirement accounts. I didn’t take any private loans.
The money I saved in these two years would have a snowball effect to provide a solid financial foundation for my future during and after law school. Having the savings was a huge accomplishment in my mind.
What I learned in my first four years of working was that I could live on very little. I also learned that I could be perfectly content on very little. That is a message that I have carried through with me my entire career and has helped me avoid lifestyle creep.