The Importance of Saving


There are many things to consider when saving for the future. The most fundamental factors are to save early and save more. No one can control interest rates or accurately predict what will happen in the stock market. The two things you can control are when you start and how much you save.

The accumulations shown above assume an earnings rate of 5%.The accumulations shown above assume an earnings rate of 5%.

Starting to save early puts time on your side. Your savings will add up; the longer your funds are working, the longer the power of compound interest will work in your favor. You earn on what you have saved, and you earn on what you have already earned. Consider the Rule of 72 – the value of money about doubles when the interest rate times the number of years equals 72. An initial value doubles in 12 years if you earn 6% and doubles in about 14½ years if you earn 5%.

Establish a Consistent Saving Habit

One of the easiest ways to establish a savings habit is to participate in your employer’s 401(k) plan. Funds are withheld from each paycheck and deposited into your account. In addition, if your employer matches part of your contribution, you accumulate even more. A second way to consistently save is with an automatic savings transfer program with your financial institution. You decide how much and when you want funds transferred from your checking account into a savings account. You can also use a payroll deduction plan from your employer and get the same results.

Saving Smart

Along with how much and how often you save, what you earn on your funds will determine how fast your money grows. You can not control what happens with interest rates or the stock market, but you can consider different types of savings vehicles that provide different returns. The simplest of these is a Certificate of Deposit (CD) in place of, or in addition to, a traditional savings account. CDs are time deposits and have penalties for early withdrawal, but they usually offer higher interest rates.

If you can accept not having immediate access to your funds, CDs can be an attractive savings vehicle.

If you can accept not having immediate access to your funds, CDs can be an attractive savings vehicle.

A final smart saving idea is to use a regular IRA. You can establish a regular IRA regardless of your income and regardless of whether you are eligible to participate in your employer’s qualified retirement plan. For 2009, you can contribute up to $5,000 if you are age 49 or younger, or $6,000 if you are 50 or older. One of the benefits of an IRA is that earnings within the IRA are tax deferred. This has the effect of increasing your earnings. You delay paying taxes until you withdraw the funds, and there is a penalty if you withdraw funds before you reach the age of 59½.

 

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