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Wednesday, August 05, 2009

Turn Your Habit to Make Saving As A Priority

Whether you are saving for a major purchase or for your retirement, you will never reach your goals unless you make saving a priority.

Many people may think they can never find the extra money to save for a new home, a dream vacation or even a much needed new car. They may think that putting small amounts will never really add up, but it is true when it comes to saving that little changes can add up to big savings on expenses. Those savings can then be put to good use for achieving your long term savings goals.

The Latte Factor

There is a coined phrase called the "latte factor." This comes from the notion that many people will think nothing of spending $2.50 each and every work day on an afternoon latte. It is true that $2.50 is not that much money. Not when you spend it once in a while. However, if you were to add up that $2.50 each day, it becomes $12.50 per work week. Then, you multiply that by roughly 21 work days per month and now you are up to $52.50, a fairly significant amount of money for most people. Right there, that person, by simply switching to bottled water brought from home, could save about $630 per year!

Compound Interest

Now, $630 may not sound like much toward the down payment on a house or even a new car. It certainly won't go too far in retirement. That is where compounded interest makes saving even a few dollars a day well worth giving up that afternoon latte. If you were to take $50 per month and invest it in your company's 401k plan for example, and you are fresh out of college, you would have approximately 45 years until your retirement at age 67. That $50 would be worth about $138,000 assuming a conservative average of 6 percent compounded interest. If you were to increase your contribution by another 10 percent each year, so the second year you are saving $55/month and so forth, then that amount would be more than $935,000!

For shorter term savings goals, compounded interest can also help speed things up. Interest rates on Certificates of Deposit (CD) are not as good as long term savings rates, but certainly better than a passbook savings account. You can purchase CDs with guaranteed interest rates for terms from 3 months all the way up to 5 years. Keep in mind you will loose your interest if you withdraw the money before the term is up, so make your savings goal for a specific time period and stick to the plan. You normally need between $500 and $1000 to purchase a CD, so within 10 latte-free months you could have your initial deposit.

Discover your own Latte Factor

The biggest obstacle in saving is determining your own "latte factor." You may have several that surprisingly add up to thousands of dollars in unnecessary expenditures. The first step in finding yours is to write down everything you spend for an entire month or longer. You may be surprised to find where small amounts of money slip through the cracks - the vending machine, the convenience store, lunches and dinner at fast food or restaurants, cigarette smoking, etc. Once you've discovered your latte factor or factors, see what you can live without or where you can cut out some of those spontaneous purchases.

Set Up Automatic Savings Withdrawal

The second step is to set up an automatic savings withdrawal. If you never see it, you won't be as tempted to spend it. You can have a portion of your pay put into a separate savings account or even directly into a savings plan that converts to higher interest bearing account when you've reached certain levels. Remember, you deserve to pay yourself first out of every paycheck. Uncle Sam takes his cut automatically. Make your next automatic payment go toward your savings and you will be able to achieve any savings goal you set for yourself.
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