Saving vs. spending: How to prioritize when you’re beginning your career

Man at grocery store contemplating what to buy according to his budget.

Retirement may feel like something you can worry about later. But if you lay the groundwork now, you may not have to worry at all. It’s as easy as simply putting a priority on saving.

Making smart financial moves, like contributing as much as you can to retirement savings or building an emergency fund, can make a big difference down the road. The challenge is not letting other financial obligations get in the way.

That can be easier said than done, so consider these tips to help you stay on track:

Prioritize your spending.

Set a budget.

"This should include your month-to-month spending and your long-term savings goals," says Glen Young, director of retirement planning for Ashton Young, Inc. in Troy, MI. Rework your budget as your income changes, or when major life events occur.

Tackle high-priority expenses and high-interest debt first.

Pay for your needs—housing, groceries, insurance—before your wants. And attack short-term revolving debt, such as credit cards, before it stacks up.

Find balance.

Don’t spend too much—or save too much. "We're not suggesting you start putting half your paycheck toward retirement," Young says. "We understand that you have other expenses and wants. Find a compromise."

Establish saving habits.

Plan ahead.

Make setting money aside for retirement a part of your overall budget. To save more and reduce your taxable income, make pre-tax contributions to your employer-sponsored retirement plan (such as a 401(k) or 403(b)).

Expect the unexpected.

Allocate a portion of your budget to building an emergency fund. Start by accumulating 1 month's worth of income in the account, then increase it, as you’re able, to cover 3 to 6 months of living expenses.

Automatically increase your savings.

Young recommends checking to see whether your employer-sponsored retirement plan offers an “automatic deferral increase” feature. This way, you can automate your good saving habits and set yourself up for success.

Divert spending into saving.

"Human nature suggests that when we see a balance at zero, we should start spending again," Young says. But once you've paid off debt, avoid taking on more. Instead, take whatever amount you were paying toward debt, and save it to pay yourself instead.

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1 Based on analysis conducted by Principal Financial Group®, August 2013. the estimate assumes a 40-year span of accumulating savings and the following facts: retirement at age 65; a combined individual and plan sponsor contribution of 12 percent; social security providing 40 percent replacement of income; 7 percent annual rate of return; 2.5 percent annual inflation; and 3.5 percent annual wage growth over 40 years in the workforce. This estimate is based on a goal of replacing about 85 percent of salary. The assumed rate of return for the analysis is hypothetical and does not guarantee any future returns nor represent the return of any particular investment. Contributions do not take into account the impact of taxes on pre-tax distributions. Individual results will vary. Participants should regularly review their savings progress and post-retirement needs.