The wealthy know this very well, as they let money work for them instead of working for it. Once you have developed this mentality, building a hefty savings account is not far away.

A common college finance problem explains the impact time can have on savings:

Do you think it’s easier to part with $95 a month or $2,413?

Joan and Michaela are both twenty-two years old. Joan started putting $2,000 a year into an Individual Retirement Account (IRA) for nine years, starting at age twenty-two and ending at age thirty-one.

Michaela waited for nine years and then started putting $2,000 a year into an IRA, at age thirty-one, for thirty-four years until retirement at age sixty-five.

Assuming both IRA’s earned 9 percent, who has more money at the age of sixty-five?

Joan will, with an IRA account balance of $579,504. Michaela’s account balance will be $470,247. This makes sense because Joan’s investment was able to grow and accumulate compound interest over more time (9 years) than Michaela’s. What is even more interesting, and shows the impact that time can have on investments, is that Joan only invested $18,000, while Michaela invested $70,000.

IRA’s are a great investment vehicle while you are young, if you are looking for more information check out our IRA guide for more details.

So we know the value of investing early, but many students or recent graduates do not have the resources to be making these types of investments. So then what? Time should be included in all money management and planning activities. If you are looking for a place to start, make sure that you consider time in your budgeting and goal setting.

Budgeting

The best budgets are always broken down into time frames. These time frames should be decided upon before beginning your budget. Many people use a monthly budget, although you can expand this to quarterly or yearly budgeting as well depending on your payment cycles. You can even create a budget for more than one time period. For example, you could create a high-level income and expense budget for the year, which gives you an estimate for how much discretionary spending you are able to make. After looking at income and expanses froma  very broad perspective, you can drill down to month by month expenses, as sometimes there are one-off expenses for trips, gifts, etc. In addition, some months may have more than the typical 2 paychecks, since there are 26 payment periods in the year, you will want to make sure to account for these in your monthly budgeting.

Savings Goal Setting

Goal setting is pivotal to saving. In order to figure our how much you want to save, you are going to need to set a goal and associate that goal with time. Setting a time frame should help you achieve the goal, not stress you out, so make sure to choose realistic savings goals that do not spread you too thin. Follow the following steps to set up a realistic savings goal:

• Calculate how much you will need to save
  • Specify a dollar value for items you are saving to purchase
  • Specify a saving goal figure (saving accounts, emergency funds, retirement, or nest egg)
• Calculate how much money you must set aside each month in order to reach that goal by the goal time

But how much should you really save? A great baseline for saving is the 70:20:10 rule. This rule is great because it can apply to any saver, at any income level. It is also a great concept because it accounts for not only long-term saving, but the short term as well.

To take advantage of the 70:20:10 rule you should allocate your income as follows:

70% – Expenses/Spending

• Rent
• Heat & Electric bills
• Cable & Internet bills
• Food
• Clothing
• Gasoline
• Medicine

20% – Savings

• 5% Emergency Fund
• 5% Goals
  • Computer
  • Vacation
  • Tuition
  • Car
  • Special Event
  • Designer Apparel
• 10% Long-term (Retirement)
  • IRA
  • 401(k)
  • 403(b)
  • Company Pension

10% – Debt Payments

• Credit Cards
• Student Loans
• Car Payment
• Other Financed Debt

Saving Strategies to Remember:

Although it seems obvious, you should be aware that if you increase or decrease the percentages in any one category, another will be affected. This can be used either positively or negatively for your savings depending on whether you exceed the rule for spending or debt payments.

Once your emergency savings fund equals 9-12 months of your current income, depending on your comfort level and situation, feel free to put money into other investment vehicles such as stocks and bonds.