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How to Start a Savings Habit

March 16, 2011
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One of the most important things you can do for your finances is to start a savings habit. The difficult part, though, is actually getting started. The thought of saving is truly overwhelming to some people. Here are some ideas that can help you start your own savings habit:

Define a Savings Goal

First of all, you need to define a savings goal. You are much more likely to start saving – and stick with your program – if you have something concrete to work for. “I’d like to save more money” doesn’t count as a savings goal. You need to be more definite, and you should aim for something you actually want. “I want to save $800,000 by the time I retire” and “I need to save $2,000 if I want to go that vacation” are a little more specific. Once you know what you need, it becomes a little easier to begin working toward your goals.

Break It Down

Your savings goal might seem a little intimidating when you look at it as one amount. However, breaking it down can keep you from becoming discouraged. If you want $800,000 by retirement, you can do it 35.1 years, assuming you set aside $500 a month and earn 6.5% annually through various investments. That’s not so bad if you start young. Finding ways to come up with $500 a month through cutting expenses or earning supplemental income, seems more doable than simply saying that you want $800,000 saved up by the time your retire.

Start Small If You Have To

Whether your goal is retirement savings, or improving your emergency fund, you can start your savings habit with small amounts. Perhaps your goal is to work up to eventually maxing out contributions your retirement account, rather than meeting a specific end goal. Start small, saving what you can. Even if this is only $25 every paycheck, it is a start. Do what you can to make sure you set that money aside each time you are paid (direct deposit to a savings account can help). Look for ways to increase the amount gradually, setting more money aside until you have reached your goals.

Choose The Right Account

Where you should keep your savings depends on how long you plan to save. For short term savings under a year, your best bet is usually a simple savings account. They typically don’t offer the best interest rate, but they do provide immediate access to your money at any time. For more long term investments, you can usually find much better CD rates. The trade-off is you must wait until the CD matures before being able to access your money without paying a penalty. When saving for retirement you’re better off going with an IRA CD to take advantage of the tax benefits associated with them. An IRA CD makes the most sense when you near retirement age and need a portion of your money to provide guaranteed returns. If you are not retired or near retirement, it usually makes more sense to take on some risk in exchange for greater returns and open an investment account instead of a savings account.

Start Right Now

Don’t wait. If you wait until you have more money, or even if you decide to wait until next week, you might find that you can always put off saving. Instead, start saving right now. Get online, visit your company HR department about a retirement plan, or go to your financial institution, and open an account right now. Putting off savings can become a habit, and the only way to break the habit of financial procrastination is to start saving immediately.

Bottom Line

You need to be emotionally invested in your savings goal in order for it to work. Additionally, your goal needs to be broken down in manageable increments so that you do not become discouraged with your progress. You can start out small, and as you see your savings grow, you can increase your savings efforts. The important thing is to start now and develop that habit of saving.