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Savings boot camp
Even the biggest spendthrifts can become savers if they're prepared to put on their game face.
Growing your bottom line

Savvy ways to save money

With home equity evaporating like dry ice on a hot day, many Americans no longer can rely on their homes as a source of quick cash. Likewise, credit card issuers are lowering credit limits for many consumers, imposing constraints on spending.

Americans are realizing that the spending party is over and it's time to build wealth the old-fashioned way -- by saving money.

Some obstacles stand in the way. For instance, real median household income grew a sloth-like 1.3 percent between 2006 and 2007, to $50,223, according to the U.S. Census Bureau. And it's not likely to accelerate much in 2008.

For the average budget-challenged family, the escalating cost of living can be discouraging. But saving money involves a clever combination of cutting expenses and allocating any savings into a bank or investment account before the money disappears.

The goal is doable with stalwart financial discipline.

The savings game plan
Set up multiple investment baskets for different goals
Once you've gotten to the point where you've contained wasteful spending, it's time to focus on savings strategies.

One approach is to set up investment baskets for short-term, intermediate and long-term goals. For the first two baskets, divert a portion of your paycheck straight into a bank and brokerage account before you can touch the money. For the long-term basket, contribute to your company's retirement plan or your own IRA.

Your short-term basket should serve as a six-month cash cushion that you can draw on in the event of an emergency or unexpected job loss.

"It can be a savings account or money market account, and the yield is the least concern with that short-term money," says financial adviser Steve Pomeranz, CFP, host of National Public Radio's "On the Money!"

"It's about protection of capital and liquidity."

Money for large purchases such as homes, vacations or a new car should be drawn from an intermediate savings basket composed of CDs and other intermediate-term savings instruments that can grow for periods of six months to several years, Pomeranz says.

A good strategy is to use the CD laddering technique. It works by maintaining a pipeline of CDs that mature at different intervals.

"The idea is to make sure the money is not completely accessible to you," says Gary Foreman, publisher of Stretcher.com.

To learn more about the advantages of CD laddering, use Bankrate's CD ladder calculator.

Finally, your last basket is for long-term goals such as retirement. Whether you invest in an IRA or a 401(k) account, you'll have access to stock and bond funds, as well as funds that contain both asset classes.

"By segregating these baskets, you don't have to worry so much if the market is going down because you know that the cycle is going to play out in X number of years. And if you manage your money appropriately during the tough times, you have a very good chance of making a decent return," Pomeranz says.

  What's your experience with investing?
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-- Posted: Oct. 27, 2008
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