Starting a savings plan may seem like an overwhelming thought, especially when you consider the need for emergency funds, car or home purchases, children’s education, retirement, and the myriad other needs on the saving list. But a few simple action items for today will get you on the right track for tomorrow.
Action Item #1: Start where you are
Determine an amount - any amount - that you can begin setting aside and do it regularly - starting now. In the beginning, the amount is less important than the habit and the earlier you start the better off you will be in the long run. You can work on increasing the amount of the regular contribution over time. You should begin by contributing to an accessible emergency savings fund. Once you have reached your emergency fund target (usually between 9 and 12 months of living expenses), you can divert those funds to your longer-term savings goals.
Action Item #2: Segregate your savings
“Out of sight, out of mind” is a powerful concept, particularly when it comes to money. You should segregate your savings dollars from those used for regular expenses so you do not consider them to be “available” for routine needs or wants. Many employers will facilitate this effort through direct deposit, which often allows you to direct your pay to more than one account. If your employer does not support direct deposit, you can use your bank to set up an automatic monthly funds transfer into a savings account.
In addition, you should take advantage of your employer’s retirement plan that will not only facilitate the “out of sight, out of mind” approach, but may also help you to increase your savings rate through pre-tax contributions and employer matches. A common target for retirement savings is 10% of your gross income. If you are working on your emergency fund and retirement at the same time, contribute to both until you have reached the desired emergency fund level and then divert those dollars to your retirement savings.
Action Item #3: Save your raise
When you find out about that next raise or bonus, resist that urge to think about what you will be able to buy with those excess funds. Instead, plan to save as much of that raise as you can by increasing the amounts being direct deposited from your pay check to segregated savings or to your employer sponsored retirement plan. Certain cost of living increases may require you to utilize some of your raise or bonus for regular expenses, but it is likely that a good chunk of it can be stashed away for later.
Action Item #4: Practice intentional buying
Before you head to the store for any reason, prepare a thoughtful list of the items you intend to buy. Once you are at the store, stick to your list. If you see something that is not on your list, determine quickly if 1) this is something you simply forgot to put on the list or if 2) this is something you didn’t know you wanted/needed until you saw it. If it falls into the second category, use the 30-day rule. Wait for 30 days, and if at that time the item is still something you want/need and you can fit it into your thoughtful shopping list using your normal spending funds, then move forward with the purchase. Many times, you will find that the 30 days will pass without another thought about the item you thought you wanted. Other times, you will find that you still want the item, but it cannot be purchased with your normal spending funds. In those cases, you can start a short range saving goal for that item and work toward its purchase.
Remember that saving is a habit, and like most good habits, they need to be nurtured more in the beginning. Put some effort into developing a solid saving habit today and you can rest a little easier tomorrow.
For more, see last week's Self Reliance post about debunking budgeting myths.