Cultivating a savings habit

Many persons in our community today have not yet developed the discipline of saving a portion of their income on a regular basis. For anyone to whom this applies, I will invite you to sit down and take an honest look at your financial situation. You can never take a journey without knowing where you are starting from and where you are going to. A journey to financial security is no different. You will need to jot down on paper your current situation- what you own and what you owe. It will create for you a “net worth statement”.{{more}} On one side of the page you list what you own. These are your “assets”. And on the other side list what you owe other people, that is your liabilities or debts. Then subtract your liabilities from your assets; if the liabilities are greater that your assets, you have a negative net worth. You will want to update your statement perhaps every six months to keep track of how you are doing. If you follow a plan to get into a positive position, you will be doing the right thing.

If you are spending all your income and never have money to save or invest, you need to look at ways to cut back on your expenses. A close examination of your spending habits may surprise you how small, everyday expenses that you can do without add up over a year. For instance if you bought a cup of coffee for $1.00 everyday at work, that adds up to $365.00 a year. If this amount was placed in a savings account that earns 5% a year, by the end of thirty years it would grow to $1577.50. That’s the power of compounding. With compound interest you earn interest on the money you save and on the interest that the money earns. And speaking of things adding up, there is no investment strategy anywhere that pays off as well as, or with less risk than merely paying off high interest debts that you have. Virtually no investment will give you the high returns you will need to keep pace with 18% interest charge payable on credit cards. That’s why you’re better off eliminating all credit card debts before investing savings. Once you have paid off those credit cards and begun to set aside some money to save and invest, it’s time to move ahead to the next stop in your journey.

Most of us have heard the saying “save for a rainy day.”

What it really means is that you never know when your car is going to break down, when the refrigerator will “pack up” or a hundred and one little accidents occur that you will need extra money for. If you have extra money put aside, you can shop around for the best deal, pay cash for it and save a lot of interest. It has often been said that to be on the safe side, you need savings put away to equal six months salary. This should be in a form that is equally accessible in case you lose your job or some other catastrophe strikes.

We all are going to get old some day and will need money to live on. The amounts available to those of us who have pensions or recieve national insurance payments will not be nearly enough for us to live comfortably in our retirement. You should, therefore, aim to save about 10% of your take home pay, to build up a retirement fund. Some financial analysts recommend that individuals amass enough to replace at least 70% of there pre- retirement income once they retire. Even if you plan to live very modestly in your retirement, you need to be aware that it is not the fun stuff like going on cruises that add up; health care expenses drive up retirement costs for most people. The fact is, the more you save, the more stable and happy your retirement will be. Investing is somewhat different from saving; saving is a passive activity, it is more focused on safety of principal (the amount you start with) and less concerned with return.

By contrast, your focus on investing is on increasing net worth and increasing long term financial goals. If you had invested $10,000 in Wal-Mart in 1970 when the company had its Initial Public Offering, your investment will be worth $13, 000,000 today; and if you had invested $10,000 in Del Computer as recently as 1990, you would be worth 6 million. But such funds should only be invested as part of your long term portfolio for e.g. in a retirement fund. Saving for your child’s college education is also an investment in the future, as is saving to make a down payment on the purchase of a home sometime in the future.

If the taught of losing money makes you nervous, then stick to savings instrument. Most savings instrument trade security for return, meaning they pay relatively low rates of interest, but if your savings are for the long haul ( for the long term), it would be wise to consult an investment adviser who would explain the various options available to you in trading risk for return. In the final analysis, our advice to you is get into the savings habit now. Start small and don’t dip into it as you will need that money for other goals in the future.

This article was submitted in support of Financial Literacy Month.