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My fiancé and I have a lot of changes coming up in the next few months. We're relocating to New York, getting married, I'm starting law school and he's looking for a new job. With all the debts and expenses we'll be facing for the next three years is there any advice you can offer on how we can save something for the future?
-- Kim Smith, Arlington, Virginia
The first thing you want to do is find a nice cheap New York apartment. You know, a nice two-bedroom with a river view for maybe $300 bucks a month -- right!
Seriously, you and your future hubby are entering a time of your lives when it's going to be very difficult to save money. Quite simply, the amount of money that will be going out is likely to be greater than the amount coming in. That's quite common, of course, for young couples.
Indeed, over the past 50 years or so, Nobel Prize-winning economist Franco Modigliani, as well as other economists, have developed what's known as the lifecycle model of consumption and saving, essentially a theory that attempts to explain the link between spending and income at different stages of life.
Of course, you can also look at much of what you'll be spending over the next few years not as spending but an investment -- an investment in your own human capital that will generate a return in the form of higher wages for the rest of your life.
So even if you manage to save very little over the next three years -- or even for a while afterwards, since you'll likely have school loans to repay -- I wouldn't get too discouraged. You'll have plenty of opportunity to sock away more down the road when your investment in your education starts paying dividends.
No matter how small, any saving adds up
That said, however, I think it's nearly always possible to save at least some money no matter how little one makes and no matter high one's expenses may seem. And even if you're able to tuck away only a mere pittance, I think it's wise to get into the habit of saving early on. That way, when the bigger bucks start rolling in, you'll already have some sort of system set up to put money away.
I think one of the best methods to begin saving is the old PYF routine: pay yourself first. Just decide on a percentage of your paycheck that you think you set aside on a regular basis -- maybe start with 5 percent or so -- and then put that amount away before you do anything else with your pay.
The idea is to live as if you're only getting 95 percent of your salary instead of 100 percent of it. The beauty of this system is that you don't have to go through elaborate budgeting techniques to find ways of squeezing out a few dollars of savings. Instead of re-arranging your budget to find ways to save, you set a savings target and then re-arrange your spending habits to meet it.
I'm not saying this won't involve some sacrifice. But you'll have a much better chance of saving money if you think of regular savings as something you've got to do, no different than paying your rent or utility bill, rather than as something you'll get to if you happen to have some money left over at the end of the month.
Once you're able to meet your savings target, you can consider increasing it a bit. Go slowly, though. You don't want to get too ambitious and then find yourself having to dip back into savings on a regular basis. Try to think of the money you do set aside as a reserve you would touch only for an emergency or for some very serious reason. (FYI, a trip to the Caribbean over spring break, no matter how well deserved, does not qualify as an emergency.)
If this reserve is your only pile of savings, then you should keep it in something that's totally secure -- a money market fund or perhaps a combination of money funds and bank CDs. Granted, they're not paying much now -- for current rates, check our Rate Search section -- but you're more concerned about keeping your principal intact at this stage of the game.
After the emergency fund, branch out
After you build a reserve equal to about three months' living expenses, you can begin branching out into stock and bond mutual funds. You can your husband can do that on your own or, better yet, do it through your husband's 401(k) or other retirement savings plan at work. This way, you may also be able to take advantage of the employer's free matching funds.
If your husband's employer doesn't offer such a plan, then you can invest in either a traditional tax-deductible IRA or a Roth IRA. If you do the Roth, you could conceivably even use the money for your emergency reserve to fund the Roth since, unlike with a regular IRA, you can always pull out your annual Roth contributions without tax or penalty. For details on how much you can contribute to a regular or Roth IRA for this year and future years, click here.
So if I were you, I'd think of the next three years as a time when you can lay the foundation for your future financial security. If you manage to accumulate a decent sum of money that will grow to a much bigger sum in the future (or provide money for a house down payment or whatever), that's great.
But even if you manage to put away a few bucks, then at least you'll have gotten used the discipline of regular saving. And the earlier you can learn the value of that discipline, the brighter your financial future will be.
Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged."