Building up savings, whether for a short-term goal like a car or holiday shopping, or a long-term one like retirement, is hard. So how can you make it easier? A conversation with my friend Alex, while picking up our kids at church last Sunday, brought to mind these three tips.
Aim to save a specific amount
The YMCA I belong to is in the midst of a massive reconstruction. Walking past the bulldozers into the Y's main building, it's hard to miss the big sign showing the organization's goal for contributions to fund the project: $11 million.
While you don't have to put a big sign by your front door, you should state your own savings goal just as clearly as the Y. Just having an exact figure in mind will help motivate you to take the necessary steps to start and maintain your savings program.
For instance, when Alex started a savings program several years ago (back when he was single), he fixed in his mind to contribute the maximum annual amount allowed to a Roth IRA. At the time, he recalled, that translated into a goal of $2,000 per year. (In 2006, the IRA contribution limit is $4,000 if you're under age 50, or $5,000 if you're age 50 or over.)
Make it automatic
Knowing just how much he had to save, Alex made his IRA contribution a part of his monthly budget. He then took the wise step of having the money withdrawn from his bank account and deposited into his Roth IRA automatically.
If you’re not a disciplined saver, automatic deposits can be huge in moving you toward your savings goal. When you’re making deposits yourself, it’s all too easy to skip one because things are a little tight in a particular month.
Setting up an automatic withdrawal service takes little effort through most financial institutions. You usually get a variety of options—weekly, bi-weekly, or monthly withdrawals, at amounts that can be as little as $25 or $50. You can also usually choose the day in the month you want the withdrawal to occur (to correspond with when you get paid, for instance). And once the service is in place, you’ll be surprised at how quickly you’ll learn to live from your remaining income.
Because he was contributing to his IRA monthly, Alex divided his $2,000 goal by 12, which comes out to roughly $167 per month. But rather than withdraw a rather odd amount from his account, he saw an opportunity to reach two goals with one plan.
Alex started making his IRA contributions at the beginning of the year, so he bumped up his monthly savings to $200. When he reached the IRA annual contribution limit in October, he didn’t stop saving. He continued to make his “contributions” for November and December—except this time into an account for his Christmas gift budget. The following January, instead of paying off a credit card loaded with holiday shopping bills, he went right back to funding his IRA each month.
Saving for the future takes vision and discipline. As Alex found, whatever you can do to build each into your own savings program will pay off in the long run.
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