How to Start Saving

You can start saving today! Can you put aside $10 per day? If you start saving $10 per day at twenty-two (22) years old, you will be a millionaire in forty (40) years. Can you save more? Everyone thinks they can wait until they are earning more money. Is waiting a mistake? Should wait because you have student loans? You know it is important, but you don’t have any money left to save. What can you do?

Saving in itself, in this low interest environment, is not enough! Simply putting money in the bank or buying CD’s is unlikely to generate enough growth to reach a million dollar goal. You will have to invest in the stock market, real estate, business or some other asset that will grow over time. It is just not enough to keep up with inflation or just maintain your investment capital. Investing in the stock market has many more advantages over the other choices. What are waiting for?

Most people are reluctant to invest in the stock market because they know so little about it. There are a lot of things going on at once! You just graduated from college and you suddenly are making enough money to live on your own reasonably. You want to get a car, furniture, new clothes and a lot more. Savings seems to drop to the bottom of your list. After all, you are young and you want to enjoy these new found earnings. The simple answer is start small because you can add to it.

Once you get past the issue of no money to save, the next question is what to do with it? Invest in mutual funds is the best solution! The typical excuse is what if I lose my money? If you invest in a broadly diversified mutual fund, it is almost a no brainer! You could invest in the total stock market index fund or Standard & Poor’s 500 index fund for example. Either choice would yield between seven (7%) and eight (8%) percent over a ten (10) year period. It is a relatively safe way of investing in the market.

Many people say they know nothing about the stock market and are afraid of the risk. After all, the stock market has been very volatile in the last five (5) plus years. Despite the volatility, the stock market has increased in the triple digits over the last five (5) years. You could stay on the side lines until you learn about it, but that could take years. In the meantime, you missed out on tremendous growth. What should you do? You have to start somewhere and you can keep your risk low.

Saving as little as two (2) thousand dollars a year from twenty-two (22) to thirty (30) years old can yield close to three quarters of a million dollars! $2,000 is less than $5.50 a day! You could skip the Starbucks coffee or take lunch to work and save that amount pretty quickly. What are willing to sacrifice now to reach your financial goals? No goals? Yes, you need goals and plans to reach them. Let’s get started otherwise you will always put it off!

Now that you have a well paying job, sign up for a 401k! Better to start small than not at all! Many companies have a match for every dollar you invest up to a certain percentage.  Thinking long term is hard to do at twenty-two (22) years old, but get started. Keep your investing simple! Investing does not have to be complicated. Saving and investing should be consistent and regular. Dollar cost averaging is an investing strategy for reducing the impact of volatility on large purchases of financial assets. It is buying a fixed dollar amount of a particular investment on a regular schedule.

How to start saving

• Put your savings on autopilot – Determine how much you can save each pay period and adjust your spending to make it happen. You can make automatic by setting up a payroll deduction and investment choice. Most mutual funds will allow smaller investments if you are contributing regularly in a 401k.

• Start small and add to it – As little as forty (40) dollars a week can add up over time. $40 per week is less than $5.50 a day! You can designate a fixed amount or a percentage, but get started. I used to add to my retirement savings contribution every year. It might be a fixed amount or percentage, but don’t give up the company match.

• Use a tax advantaged account – This should be a no brainer! You actually save taxes and it is a great way for the government to subsidize your retirement savings. Another choice is a Roth IRA which uses after tax money, but it grows tax free! There are contribution and salary limitations, but you can probably take advantage of it early in your employment.

• Don’t let debt stop you – Too often, consumer debt and credit card debt stops people from contributing to retirement savings. It is not black or white! If you are repaying debt at interest rates of five (5%) to seven (7%) percent, you should still contribute to your 401k. The growth rate will surpass the cost and you are missing the company  match and tax subsidy which adds up quickly. Time is the most important factor in investing.

• What is your savings goal? – If you do not know where you are going, you will never get there! How much do you need to retire? You still need to save for other goals such as buying a home, car or some other major purchase. Then you’re your goal and determine how much you need to save each week/month/year to reach our goal. Last, monitor your progress and adjust your effort to reach your goal. Savings means you will have choices!

• Start a budget – Budgeting helps you focus on what is important to reach your financial goals. It also makes you aware of your expenses. I use it to help me think about my long term financial goals. It is a great way to keep your expenses in check, but it is not the only way. Another way is to develop a spending plan based on your financial goals.

• Cut your expenses – Similar to a diet, you need to cut calories to lose weight. Reducing your expenses is a little more complicated! You should make a conscious decision regarding how you spend your money and find better solutions. I routinely review all of my expenses every month to lower my expenses. Small changes add up! You can take your lunch to work, drop cable, carpool to work, shop  your insurance or just increase your deductible. There are savings if you look for them.

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