It’s easy to postpone starting to save for a later day, but a solid plan is key to success. By following some basic guidelines, you’re more likely to achieve financial security.
· Pay yourself first. Use automated transfers to get in the habit of saving. Money will be transferred from your account without you seeing it, which makes you less likely to miss it. Simply complete a form authorizing your bank/credit union to receive a portion of every paycheck and deposit it directly into your savings account.
· Save 10% of your paycheck. The general rule of thumb is to save about 10% of each paycheck. If that seems too high, try 5% and work your way up to saving 10% of your earnings. Add 1% every year you get a raise until you reach 10%.
· Know yourself. Examine your goals to determine which savings plan will work best for you. For example, don’t invest all your money in an aggressive stock or mutual fund if you’re conservative with your money. If you’re saving for retirement, select a plan that will fit your financial needs down the road.
· Realize that age matters. Always take into consideration how much time you have to save for your goal. If you are a recent college graduate, you have several decades to ride out the highs and lows of the market and can take advantage of more high-risk investments. If you’re only a few years from retirement, you might not have the time cushion to afford to be too aggressive.
· See the benefit of compound interest. The simplest way you can invest your money it to leave it alone and let it "compound" over time. You earn interest not only on what you save, but also on the dividends generated. The earlier and more you save, the more your money will grow.
· Use dollar-cost averaging. This is the process of routinely investing a set amount of money over time, rather than all in one lump sum. It’s a convenient savings method, particularly for beginning investors. For example, each month transfer $25 or $50 from your share draft account directly into an investment vehicle such as a traditional or Roth IRA. You reduce your overall risk from market fluctuations because your money buys more shares when the price of a share is down, and your money buys fewer shares when the price of a share is up. Bottom line: You’ve reduced your investment risk.
· Use the Rule of 72. To figure out how long it will take for your investment to double with compound interest, use this rule: Divide 72 by the interest rate you expect to receive on an investment. For example, if your investment earns 4% interest, your money will double in 18 years (72 divided by 4 is 18).
Article provided courtesy of Option 1 Credit Union. Copyright 2008 Credit Union National Association. All rights reserved.
