We're all told to save for retirement, to save for our children, to save for the downpayment on a home, to save for a rainy day. The list is exhausting not to mention daunting. Most of us fall subject to a game of mental accounting: We mentally spend the money we earn before we actually earn it. This behavior typically works against our best intentions to save, and we are left with too much month remaining after our money is spent. But perhaps a shift in perspective can be helpful in reshaping how we play this game of mental accounting. Maybe with the right strategy in place, saving can be made easy.
Try incorporating these helpful savings strategies today, they will surely pay dividends later:
1) Contribute to your employers sponsored plan at least to the point of the maximum company match. This is free money, don't turn it down.
2) Pay off all high interest (and by the way, non-deductible) debt. This is obviously easier said than done. But just think for a moment: every borrowed, high-interest dollar you owe to your credit card company (or other creditor) is weighing down your savings power at an accumulating rate until that dollar (plus interest) is paid back. By making a concerted effort to pay these debts down, you are creating the possibility of directing future funds to your savings goals. Figure out how much you owe to your high-interest creditors and try to formulate a pay back period of two years or less. Tabulate how much you can pay monthly and sacrifice discretionary/non-essential things to make these payments work. A little struggle today will make for a far more comfortable tomorrow.
3) Keep an emergency fund of at least three months living expenses. I recommend maintaining a high yield online checking account to hold these funds. Check out Capital One 360 or Ally Savings. You can even direct a set amount of money to be withdrawn from your checking account on a specifc and recurring day of your choosing (i.e the 1st and/or 15th of every month), and deposited into your online savings account. The most successful adopters of this strategy implement a recurring deposit program and then "forget" that it is set up.
4) Contribute (at least to the maximum allowed) to a tax-advantaged retirement or health savings account. Not only will th is help you save for retirement or healthcare expenses, but it will help reduce your taxable income each year. In this era of high-deductible health insurance plans, you may very well end up actually using this money and being thankful that you didn't pay tax on it.
5) Establish and contribute to a child's educational savings account or custodial account. Believe it or not but, it will be a lot easier to pay for tuition when your child is young. Earmark some money every month to be deposited and further invested for this purpose.
6) Keep investing. Disciplined and regular investing is the key to ensuring that you have ample funds to fund your future goals and provide for income replacement during retirement. Wealth accumulation is an endurance sport and the best way to ensue that you stay 'in the game' is to systematically add funds to your investment account on a regular basis.
Jason M. Gilbert, CPA/PFS, CFF
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Jason Gilbert is Managing Director of RGA Investment Advisors LLC. He has over 10 years of experience in investment advisory, including portfolio construction, financial strategy, and advanced planning for high-net worth and institutional clients. He maintains an extensive background in both forensic accounting and personal finance, and serves as a fiduciary and trusted partner to his long-standing clients.