Saving money should be a no-brainer. But a few years ago, most Americans just weren't doing it. They only held on to 1 percent of their income in 2005, which is well below the 12 percent personal savings rate they achieved in the 1980s. The financial crisis of 2008, however, was a shock that made many people aware of the need to build a cash cushion. The national personal savings rate bounced back to about 5 percent by 2011 [source: St. Louis Fed].
But since savings accounts normally pay less than 1 percent interest, some people think they need the advice of financial experts to grow their nest eggs. The fact is, though, that accumulating savings is not rocket science. And those low interest rates actually make regular saving even more important: In other words, you can't wait for compounded interest to grow your nest egg. Steadily socking away a portion of your income is still the best way to amass the money you need.
Saving is not so hard once you set your mind to it, and learning a few simple secrets can make the process even easier. On the next pages, we'll look at five relatively painless ways to put away a portion of your income for later.
Paying down debt is arguably the most valuable step you can take toward accumulating savings. As long as debt payments are draining a sum from every paycheck, you aren't going to have the funds for a significant saving program. And because the interest on your debt is always going to be higher than what you'll earn with a traditional savings account, reducing debt is the best way to put any extra money to work. Once you've cleared away your debt, you can put the funds you were formerly paying each month on a loan into your savings account.
Avoid the habit of just carrying debt. For example, if you pay only the minimum on your credit card, it will take you years to pay off what you owe. And credit card interest is sky high. Your goal should be to carry no balance on your credit card.
But at the same time, that doesn't mean all of your extra income should go into debt reduction. Even if you owe money, you need a savings account. In addition to a rainy day fund for emergencies, you need to put away money for upcoming expenses like insurance premiums. Draw up a budget that lets you pay down debt as quickly as quickly as possible and accumulate some savings as well.
There's a lot of psychology that goes into saving. That's why one way to encourage yourself to save is to put away the plastic and pay in cash. Handing over currency when you buy something gives you a clear sense that you're spending "real" money. Credit or debit cards are so easy to use, they tend to make you forget you're spending your hard-earned dollars.
When you make that cash purchase, get in the habit of putting the change aside and depositing it into a savings fund. You'll be putting aside a small portion of everything you spend, and those dollars and coins will add up. Do the same thing with your checking account: Round up each amount to the next dollar when you enter it in your checking record. You'll accumulate extra funds in your account, which you can later move into your savings.
Paying cash can also help you to stick to a budget. Divide up your weekly spending and put the portions into a series of envelopes for various expenses. One envelope might be for dining out, another for entertainment, a third for gasoline. If you run out of cash before the week is over, you'll have to cut back. You might need to eat dinner at home, opt for a video instead of a movie, or take the bus while you wait for the next week to roll around.
This one's really easy. You've just come into a nice chunk of money that you weren't expecting. It could be a gift, a tax refund or the proceeds of a garage sale. Maybe it's an inheritance, an insurance settlement or a bonus at work. Whatever the source and whatever the amount, it's a golden opportunity for adding to your savings. Set aside a portion of that money, and put it into your savings account.
A regular windfall is another opportunity to save. Usually this comes in the form of a raise at work, but it could be a lower rent bill (if you move into a less expensive place) or the end of a car payment -- anything that puts more money in your pocket every month. The idea behind socking it away is this: You got along without it before, so you don't need to spend it now. Save it and you won't miss it.
The bigger the amount of the windfall, the more you should think about putting it into long-term savings. You're not as likely to need a substantial chunk for emergencies, so you can use it to build your retirement account. Paying off debt should also be high on your list. But don't try to save every penny. Take a portion of your bonanza and splurge -- buy that new smartphone or take that dream vacation. It'll help you feel good about what you do save.
Back in the day, saving to buy something was a common way of managing money. Then, society went credit card happy and shifted to a "buy now, pay later" mindset. Credit cards gave people less reason to save and less money to put aside, because they're loaded with debt. But saving now to buy later -- the old-school style -- is an excellent way to avoid that cycle and get on the road to building a nest egg. Here's why:
- It gives you a reason to save. You're putting money aside for a car, a vacation, a new kitchen or something else you want. Every dollar you save brings you closer to your goal.
- You avoid the cost of making payments over an extended period of time. Financing a purchase or buying with a credit card often means forking over extra money in interest.
- It restrains impulse purchases. If you have to save up to buy something, you have time to think about whether you really need it. A survey conducted in Britain by the Yorkshire/Clydesdale Bank showed that people actually enjoy their purchases more when they save in advance [source: Lowe].
Putting aside money for a big-ticket item works best if you set up a savings account for that specific purpose. You can budget regular payments into the account, calculate when you'll reach your goal and watch your funds grow. Setting up accounts for each of your savings goals in different banks makes even more sense. If your money's not as accessible, you won't be quite as tempted to raid your savings for some other purpose. As your savings accumulates, you can transfer it to other investments like certificates of deposit (CDs), which pay a bit more interest and further discourage you from cashing out.
Regular saving, even of small amounts, makes the most sense. Don't put it off until you have "extra" money to put away. The easiest and most painless way to do this is to take decision out of the equation by making saving automatic. That way, you're less likely to be torn between saving and splurging. And you don't have to remember to save. It just happens.
The easiest way to automate savings is to have part of your paycheck deposited directly into your savings account. Working with your company's accounts payable department, you usually can direct your bank to put a portion of your pay into checking and the rest -- say, $50 or $100 per week -- into savings. That's it. Every week, you'll be saving money without even thinking about it. And you'll be surprised at how quickly your savings accumulates.
If your employer offers a 401(k) retirement plan, you'll have an even better opportunity for saving for the future. Once you sign up for a 401(k), all you do is decide how much money you want to contribute to your plan from your pay. That amount goes into an investment plan of your choice and is not taxed. Many employers make additional, matching contributions as well, so your retirement savings add up even faster. You can learn more about these plans in How 401k Plans Work.
However, don't overestimate how much you can afford to save on a regular basis. It's better to save a little less than to raid your savings account on a regular basis -- or to pay a penalty for drawing money out of your 401(k) plan early. For more tips on building up your savings, check out the links on the next page.
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- Bank of America. "The Keep the Change program makes saving automatic." (October 27, 2011) http://www.bankofamerica.com/promos/jump/ktc_coinjar/index.cfm?&statecheck=NC
- Bankrate.com. "Investing in bonds: Introduction." (October 27, 2011) http://www.bankrate.com/brm/green/sav/svgs1e.asp
- Bankrate.com. "What is online banking?" (October 27, 2011) http://www.bankrate.com/brm/olbstep2.asp
- Burt, Erin. "Save Now, Retire Rich," Kiplinger, December 16, 2004. (October 27, 2011) http://www.kiplinger.com/columns/starting/archive/2004/st1216.htm
- CNN/Money. "What are defined contribution plans?" (October 27, 2011) http://money.cnn.com/retirement/guide/401k_basics.moneymag/index.htm
- Dollar Times. "Early Mortgage Payoff Calculator." (October 27, 2011) http://www.dollartimes.com/calculators/early-mortgage-payoff-calculator.htm
- Lowe, Jennifer. "Consumers save now, buy later," What Invesments, August 19,2008. (October 27, 2011) http://www.whatinvestment.co.uk/banking-and-savings/cash-accounts/580641/consumers-save-now-buy-later.thtml
- McCallion, Pauline. "Crunch encourages 'save now, buy later' attitude," Yourmoney.com, August 15, 2008. (October 27, 2011) http://www.yourmoney.com/news/2008/08/15/crunch_encourages_save_now_buy_later_attitude_/
- Mint.com. "The best free way to manage your money." (October 27, 2011) https://www.mint.com/
- Rapacon, Stacy. "7 Sneaky Savings Strategies for Generation Y," Kiplingers, February 26, 2010. (October 27, 2011) http://www.kiplinger.com/columns/starting/archive/7-sneaky-savings-strategies-for-generation-y.html
- St. Louis Fed. "Personal Savings Rate." (October 27, 2011) http://research.stlouisfed.org/fred2/data/PSAVERT.txt
- Singletary, Michelle. "The Best Way to Handle a Cash Windfall," NPR, May 30, 2006. (October 27, 2011) http://www.npr.org/templates/story/story.php?storyId=5439371
- Treasury Direct. "Treasury Securities & Programs." (October 27, 2011) http://www.treasurydirect.gov/indiv/products/products.htm
- Wachovia."Way2Save® Account Agreement." (October 27, 2011) https://www.wachovia.com/foundation/v/index.jsp?vgnextoid=c8fa5221e11aa110VgnVCM1000004b0d1872RCRD