Putting money into a checking account is akin to burying your talents, except the talents waste away slowly in the dirt.
Minute by minute, the cold, hard cash you earn from your job loses its spending power. Whether you put it in your checking account, hoard it in Venmo, or just keep it on hand, those stagnant savings are fighting a constant enemy: inflation.
The Federal Reserve attempts to regulate a steady rate of 2% annual inflation, maintaining that this yearly increase is healthy for a stable economy.
Though inflation is regulated, it will still eat away at your savings. Investing isn’t just about making money. On a more fundamental level, it’s about retaining the value your savings currently hold.
Fortunately, there are safe ways to store money in low-risk funds that will grow in proportion with the overall growth of the general market, outpacing the rate of inflation in the long term. Roth IRAs and 529s, for example, are plans that reserve savings for educational spending and retirement, and they include the added bonus of allowing for withdrawals to be made tax-free.
The setback is that funds from these plans can only be drawn out tax-free when used for their intended purposes. But even with this limitation, plans like Roth IRAs and 401(k)s are still safer retirement savings options than Social Security.
Considering that the set age for eligibility on Social Security withdrawals was adjusted beginning in 1983, the program’s security will continue to deteriorate in competition with inflation, cost of living, and population growth in both the short and long term.
Luckily for students, because of a decision made by the Department of the Treasury in 2004, the cash they earn through student employment is exempt from the FICA taxes that contribute to Social Security and Medicare. This conditional tax exemption offers a chance to pocket some extra cash, but that same money could instead be placed in a retirement fund that is safer and more personalized than Social Security.
Because students cannot even contribute their campus employment earnings to Social Security, it is prudent to take whatever would be lost in self-employment tax and deposit it into a personal savings account instead.
Though individuals can open Roth IRAs at any age, contribution limits and the effect of time on compound interest benefits students who invest early rather than just waiting for a steady income after graduation.
The amount of post-tax income that can be deposited into a Roth IRA is set at a yearly limit of $7,000. While it may be unreasonable to expect students to deposit the contribution limit every year during college, depositing as much as possible in a given year builds a savings account in preparation of the limitations that are placed on future years.
Additionally, the effect of time on long-term compound interest ensures that the best kind of investments are the ones made as soon as possible. If you deposit $7,000 every year until retirement and expect an annual compound interest rate of 8%, the difference between savings started at the age of 18 and 22 would be upwards of $400,000.
Even though it may require saving a dollar here instead of spending a dollar there, the added benefit of a few extra years gaining interest is well worth it, and the sacrifice of a few bucks put away is worth cancelling that next Taco Bell run.
