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Is Saving When You’re Young Foolish?
June 21st, 2007 by 
investoid
Cliff Mason, a thestreet.com columnist (and Jim Cramer’s nephew) wrote last week about the stupidity of saving when you’re young. His long ramblings form a pretty incoherent argument (he self-admittedly got his job because of his connections), but there are a couple of interesting points within his diatribe:
- You shouldn’t save money if you have high interest student loans and the like.
- The miracles of compounding notwithstanding, the amount you’re earning on early savings (in his example, $5000) can be made up for a few years later when you are making more money than an entry-level position and will be in a greater position to save.
I would argue that by putting money towards your debts, you are in fact saving since you are reducing the future amount of interest you would pay. For me saving is all about earning a return on money you are not spending for immediate goods and services. So if your return is higher by paying down debt than it would be on an alternative risk-adjusted investment, then the choice becomes clear.
I can see the logic behind his argument about the relatively small increase in total savings from interest within the first few years. However, I don’t think the absolute return on savings is the main reason people should save early. Saving brings about financial discipline in an individual. If they learn how to save money early, then they are more likely to save money as they get older. The converse is also painfully true - you don’t have to look hard to find someone you know facing some financial difficulties. Unless there was a major disaster (loss of job, sickness, etc.), they can probably attribute some of their current issues to the fact they weren’t very good with money from a fairly early age.
I read an article on Yahoo! Finance yesterday that mentioned that nearly 60% of Americans have less than $25,000 in retirement savings (outside of pensions, etc.). How do they expect to actually retire? Most people have never thought about garnishing a portion of their wages for savings, and as a result never realized the implications of not saving enough until it is too late.
So once you’re out from under the debt heap that is student loans (or all debts whose interest is higher than what you can earn in a high-interest savings account), I think it’s important to start putting money in the bank on a periodic basis. It will set you up for financial freedom over time.
Posted in Personal Finance | 
June 21st, 2007 at 9:56 am
Great post (though admittedly, I didn’t read the article yet). One problem might be that most people look to what the generations before them did and they see that somehow, their parents or grandparents still managed to retire and had much smaller incomes (adjusted for inflation). What they fail to realize is that, most of their parents or grandparents had some form of pension. These aren’t anywhere near as common as they used to be.
I can’t tell you how many people I know that aren’t even sure if they have a pension! And these are the same people that have yet to start contributing to an RRSP because their mortgage and bills eat up most of ther pay cheques.
Now that’s a scary thought!
June 21st, 2007 at 10:06 am
I think the kid who wrote that article is incompetent in personal finance and probably a complete idiot. He himself admits he sucks at savings and will never have the discipline to save. His only experience is loaning money out to his friends, which was more than likely Daddy’s money. Plus, his article rambles for 5 pages when he could’ve summarized his “findings” in about 2 paragraphs. It was more like he was trying to brag about his connections and how Daddy bought him an apartment. I have lost all respect for Jim Cramer if the writer is from the same bloodline…
June 21st, 2007 at 10:45 am
Paying off debt is definitely saving.
Starting young is good for discipline as you mentioned. It’s also good for the learning process…ie if you are going to make investment mistakes, it’s better to do it when you are young and with smaller amounts of $$.
Mike
June 21st, 2007 at 12:50 pm
Wow. I pray for Gen Y- not to manage my money! What an article- for all the wrong reasons.
I do agree with you about setting up good habits early. How many times have we had to do something and we said “I’ll get back to it” and we never did. Same thing with saving.
June 21st, 2007 at 2:37 pm
Yes, paying off loans when your young should be a priority. However, I believe that developing saving habits at a young age will stay throughout life. I base my whole personal finance future on good saving habits.
FT
June 22nd, 2007 at 4:35 am
I think this kid’s advice is taking for granted that everyone has rich parents that will bail them out when they go broke. Most people would worry about spending $2000 on a stereo system when they don’t have an emergency fund, because they might need that $2000 to pay for car repairs or medical bills or some other unforseen expenses. He seems to assume that the only reason to save money is to pad your net worth, but money in the bank gives you a safety net. He of course doesn’t need a safety net, because who needs one when you have rich relatives?
June 22nd, 2007 at 7:23 am
[…] a counterpoint to Cliff Mason’s post on not saving when you’re young, I came across a very good article by Laura Rowley called […]
June 24th, 2007 at 3:01 pm
I’m with you, Investoid. Habits are very important for future success. So the discipline of saving (which means paying off non-investment loans) needs to start young.
June 25th, 2007 at 1:32 am
Thanks for posting the link to the article. It’s good to read a financial humour piece once in a while. Reminds one of the story of the three little piggies.
June 29th, 2007 at 12:09 pm
I listened to Cramer’s “interview” of Mason last week as a result of subscribing to Cramer’s Wall Street Confidential podcasts. I’ve also read Mason’s article. After thusly wasting my time I can say with complete certainty, Mason is an idiot as are any who would take his personal finance advice. He apparently has some skills however. That of picking wealthy parents and influential uncles.