Money Matters/Five ways to be a disciplined saver
Published 5:56 pm, Thursday, June 28, 2012
A huge challenge for Americans today is getting and staying financially secure. There are so many temptations and obligations in our daily lives that make it all too easy to fall short of our financial goals.
To succeed at this difficult undertaking, one must be a disciplined saver. Here are five ways to increase your odds of successfully building your savings:
1. Pay yourself first
Arguably, the most important savings principle of all time is: Pay yourself first. Many people fall into the trap of allocating money for bills and discretionary spending before attempting to set some aside for savings. Not surprisingly, there's often nothing left to save.
This can be true for affluent and less-fortunate individuals alike. Some high earners are especially poor savers because they've never had to develop the habit.
2. Be prepared
Another important priority as a saver should be to build an emergency fund. Opinions differ over how large an emergency fund should be, but three to six months of living expenses is a popular rule of thumb.
Keep this money in safe, liquid assets such as cash and cash equivalents. You don't want to lose your job and then learn that your emergency fund has lost a portion of its value because you invested it in stocks or other securities that are experiencing a downturn.
Also consider keeping some money in a safe. Following extreme disasters, such as unusually violent weather or a terrorist attack, you may not be able to physically withdraw cash from your bank. So set aside a very small percentage of your savings as cash in small bills and store it in your home.
3. Respect the clock
There are advantages to getting started early with a savings plan beyond being financially prepared to handle emergencies. Accumulating a retirement nest egg is easier when you allow your investments to compound over a longer period of time.
A hypothetical example: Twins Bobbi and Kris are 45 and have each been investing $3,000 annually in an IRA that earns 6 percent every year. Bobbi's projected balance at age 65 is about $617,000, while Kris is expected to have amassed about $393,000.
Why the big difference? Because Bobbi started her $250 monthly investments at age 21 and Kris didn't start hers until she turned 28. Kris is amazed to learn that her projected balance is more than $200,000 lower even though her investment was only $21,000 less. The power of compounding is that strong!
4. Parlay your salary
Among the strongest savings weapons in anyone's arsenal is his or her salary. Naturally, you need this money to pay bills and enjoy life. But knowing how much of it to apportion to savings at a given time can greatly bolster your financial security.
For instance, if you're married, look to parlay that double-earnings power. Perhaps, after each spouse reaches a certain salary level, you could save part or all of the lesser of your two incomes while using the greater income to pay expenses.
5. Save thoughtlessly
The best way to save may be to do so without thinking. That doesn't mean "without foresight." It means to automate your savings as much as possible so you don't have to remember to do it.
If you haven't already, sign up for your employer's 401(k) plan so that part of your paycheck automatically is deposited in your retirement account. Also, assuming you're using direct deposit for your paychecks, maximize that functionality: Open a savings-only account and direct a carefully chosen percentage of your salary into it every pay period.
Putting it all together
To be a successful saver requires discipline and, ideally, a plan. Rather than going about it haphazardly, put it all together into an overall savings strategy that includes a regularly reviewed budget and room for adjustments.
This is a general discussion and is not intended as specific advice. Each person's savings situation is different, so discuss your particular needs with a qualified adviser.
Norm Grill is a certified public accountant and managing partner of Grill & Partners LLC, accountants and consultants to closely held companies and high-net-worth individuals, with offices in Fairfield and Greenwich. He can be reached at n.grill@GRILL1.com.