We know how important it is to save money, whether for retirement, college tuition for the children, a new house, or some other goal. However, for many, living from paycheck to paycheck becomes routine; we may have the best intentions, but determining how to save money every month can be a difficult problem. What strategies can we use? How can we be more disciplined?
The first step is to make your savings automatic. Your place of employment may well have a defined-contribution retirement plan, the best-known of which is the 401(k). These are individual accounts into which you make deposits on a regular basis — usually with each paycheck — and which then grow, tax free, until your retirement. Generally, you can set up automatic deductions from your paycheck, whereby a certain amount of money flows automatically to your account with each paycheck you receive. There are annual limits as to how much you can contribute to your 401(k); try to make as big a contribution as you can, short of the annual limit. If your employer offers matching contributions, be sure to take advantage of those, too — that’s free money.
Surprisingly, many employees at companies offering 401(k)s fully intend to open retirement accounts, but procrastinate and never get around to it. More and more companies are therefore offering automatic enrollment: new employees are automatically enrolled in their company’s 401(k) program, with a certain percentage of each paycheck going into the account and invested in a designated fund or basket of funds. Here, inertia is rewarded: it takes positive action on your part to STOP saving money every month!
If you don’t have a 401(k) or have additional money to invest, you can purchase a mutual fund or other investment vehicle directly at an investment house and arrange with your bank to make automatic transfers according to a schedule that you establish, say $500 each month. These may be Individual Retirement Accounts (IRAs) or taxable savings accounts; if the latter, try to select a fund in which the manager has a “buy and hold” strategy, minimizing trading. Frequent buying and selling by a mutual fund manager generates annual capital gains earnings, and the tax burden will be passed on to you. (Some buying and selling is inevitable in any actively managed fund; index funds are a good bet for a taxable savings account, although a certain amount of trading occurs even with index funds.)
Your savings strategy should evolve as you grow older. Young savers can afford to be somewhat aggressive and chase growth; older savers close to retirement should invest more conservatively. This involves tweaking your portfolio on a regular basis. However, even this process can be automated by investing in life-cycle funds. These funds, offered by dozens of reputable investment houses including Vanguard and T. Rowe Price, set you up in a savings program that automatically transfers your savings, gradually, to more conservative investments as you grow older. It can’t get any easier.
Once you’ve set up your automatic monthly transfers to your 401(k), IRA, and other accounts, you’ll need to monitor their performance. Don’t get into the habit of swapping funds on a monthly basis, but if you have a fund that’s performed poorly against benchmarks for a few years running, you may have a loser and may want to put that money elsewhere. If you’re married or are investing together with a partner, one of you is likely better with money than the other — assign that person to be the primary in terms of savings maintenance. Make sure that one of you is at least looking at your monthly statements and taking note of performance.
Setting up an automatic savings plan is as easy as it’s ever been. There no reason for you to worry over how to save money every month; it can be done for you.
An investment calculator can be a wonderful tool if you are contemplating investing but are not sure which scheme will give you the best financial rewards. With so many companies now advertising on the internet, it is easy to gain access to a great many investment opportunities.
Many companies who are available to handle your investments will feature an investment calculator on their website. These are usually easy to use and will give you an idea of what return you can expect if you put your money with them. The calculator is there to help you get a clear picture of what you can expect back after a certain length of time. There are many variables which you can enter into the equation and all of these can be taken into account when calculating the results.