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Saving automatically

Question: I'm 21 years old and a full-time college student, but I also string pearls and hostess on occasion. I'm paid in cash for both jobs. (Is it okay to say that?) My college is paid for by scholarships, and I have about $3,000--all of which I've earned myself--in the bank. I can't even imagine myself being old at this point, but I'd like to start a long-term investment to save for whatever's in store for the future--retirement, lay-offs, what have you. I would feel more than comfortable making a base contribution of $100 each month. I'm illiterate in this department. What should I do? Thanks a lot, Collin, Birmingham, AL

Answer: This is terrific. You're going to be in great financial shape saving $100 a month starting at age 21! The simplest, most effective way to pay yourself first is to "automate" your savings. I would set it up with your bank or credit union to have the $100 automatically siphoned off into savings every month. The money won't look like much at first, but it will grow over time.

What I also like is that you want this savings to be there for the long-haul and that doesn't mean only for your retirement. To be clear, I think everyone should take full advantage of any retirement savings plan offered at work or an IRA you set up on your own. But too much of our thinking and advice about savings has been narrowly focused on the last third of life.

A savings margin of safety will allow you to take risks with your career and jobs. Savings should be less about retirement and more about funding changes throughout life--including retirement. "The new goal is to have sufficient assets to liberate yourself to work," says Marc Freedman, head of Civic Ventures, a nonprofit that encourages people to launch second and third careers. "You save not to have freedom from work, but freedom to do the work you want."

Where should you put the money? For now, I would lean toward an online savings account or something similar. Nothing fancy. The savings will be there when you need it to fund the transition from college to job.

As the pot of savings gets bigger I would then look into putting some of the money into stocks. Before you do that you'll want to learn more about investing. When you get a chance, take a look The Random Walk Guide To Investing by Burton Malkiel. It's short and it covers the basics of investing well. My book The New Frugality: How to Consume Less, Save More, and Live Better is geared toward helping people manage their money simply and well over a lifetime.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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