By Yoke M. Allen
It’s no secret that most Americans save far less of their disposable income than their counterparts in the rest of the industrialized world. Although this trend has continued for some time, it shouldn’t be considered irreversible.
Why Save? There are many sound reasons for beginning a serious savings effort. One of the most important is that regularly contributing to a savings plan can help individuals of all income levels make the most of their financial resources. Savings can also lend a sense of confidence and direction to your life. As your monthly and yearly balances grow, you’ll be able to point to the tangible results of your financial discipline, and setting aside a certain percentage of your income will become that much easier. Not only out of force of habit, but because the more savings you have, the harder that money will work for you through the miracle of compound interest.
Without savings, many of life’s major milestones, such as buying a home, paying for college or enjoying a comfortable retirement, would be nearly impossible to achieve. Putting off saving by thinking “I’ll find the money somehow,” or counting on a windfall or inheritance in an uncertain future, are both unrealistic and needlessly risky.
Individuals with savings are able to deal more easily with life’s unexpected turns — the kind that seem to crop up regardless of how carefully we plan. Savings can provide a cushion against the occasional major home or auto repair, or an uninsured accident or illness. Conversely, savings can also help you make the most of a sudden investment or career opportunity. In either case, the pressure to take on additional and often high-interest debt is removed — an important point, as this is just the type of debt that can be so detrimental to a planned savings program.
Not Just for the Wealthy: It’s not true that savings plans are only for the wealthy. Even those with a relatively modest income can save on a regular basis, and do so over the course of a lifetime. If this sounds an impossibly difficult task, it’s a good deal easier than you think. Just a few simple steps, once you decide to take them, will make for a relatively painless savings process.
Dos and Don’ts: Many prospective savers make the common mistake of trying to set aside a portion of their income after all their other bills have been paid. However, at the end of the month the amount they planned on saving has unfortunately already been spent. The easiest way to avoid such an outcome is to think of your savings plan as your most important creditor, paying it first. Choose an income percentage you’re comfortable with and put it aside before paying the rent, utilities, etc. If you wish, the amount chosen may be modest, at first, to make things easier. Once you begin, however, deposits should be made regularly and over an extended period of time. For most people, the process really does work. Moreover, you’ll be surprised to find that the money you were previously never able to set aside isn’t even missed — at least not as much as you had thought.
If you can afford to increase the contribution percentage as your income rises, do so. Even if you can’t, your account will begin to show significant gains before too long — and the more results you see, the more you’ll be encouraged to save. A professional financial advisor can help you begin your savings efforts and, further down the road, help you stay on track.
NOTE: This article does not constitute tax or legal advice. Consult your tax or legal advisor before making any tax- or legally-related investment decisions. This article is published for general informational purposes only and is not an offer or solicitation to sell or buy any securities or commodities. Any particular investment should be analyzed based on its terms and risks as they relate to your circumstances and objectives.
Yoke M. Allen is a financial advisor for Morgan Stanley Dean Witter and can be reached at Yoke_Allen@msdw.com. |
