We all know we’re supposed to save money. I don’t know how many times I’ve told people that if you want to retire, you’re just going to have to save more money. Most of the time the people I’m speaking with will nod their head yes, go out the door and do absolutely nothing about saving more.
I’ve recently started trying a different strategy with my financial planning clients. We’ve started to put money away in different accounts. This way we can monitor each account and allocate savings for things we think are important.
Start with automatic withdrawals.
I think this is the magic bullet in saving. If you have to write a check to different accounts, you’re just not going to do it. You’ll find lots of reasons that you can’t this week. Before long you’ve missed a month and then you just say “why bother.”
Instead, if you have automatic withdrawals set up for each account you don’t even have to think about it. The money is never there and you’re never tempted to spend it. You’ve put your money in a savings account for a specific purpose. Doesn’t that sound like a better idea?
Use different asset allocations.*
If your goal is retirement and it’s 30 years away, you can afford variability that’s likely to come in your account. On the other hand, if you need to money in six or seven years for college funding, you might not have the luxury of having a market meltdown right before your child goes to college. The longer your time horizon before needing the money, the more equities you can afford to have in your portfolio.
Remember, the beginning always looks pretty grim.
The first several years of a savings program always looks pretty ugly. You put money away and at the end of the month you might say, “is that all there is.” The best thing to do is to choose an asset allocation, save your money and don’t look at it anymore than once a year.
After several years of this you’ll look at your account and say “wow”. You’ll have saved a significant amount of money! The challenge with this is the beginning always is ugly. You just have to get through it if you want to reach your goals.
Save 50% of any raises.
If you’ve set up automatic savings accounts, this is easy. If you haven’t, it’ll be almost impossible.
Every raise you get, immediately call your investment advisor and have them increase your automatic withdrawals by 50% of whatever your raise is. This can be one of the more efficient ways for you to save more money and reach your goals with more safety.
You might want to start your savings program for a retirement plan. We’ve got a report on getting ready for retirement. I suggest you download and read this report. It might help answer questions you have about what you’ll be able to stop working when the time is right.
*Asset allocation does not protect against loss of principal due to market fluctuations. It is a method used to help manage investment risk.