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Starting a savings plan

Dear Dr. Don,
Hi. I would like to know how I could develop the habit of saving. I have an income from my husband but if I manage this money wisely I know I can save some of it.

It's not much, but it's something. We're talking about $800 a month.
Elizabeth Earnings

Dear Elizabeth,
I'm going to rely on two pieces of conventional wisdom to help you: "Pay your self first" and "out of sight, out of mind."

You have to make a commitment to saving. Establish a savings goal and then implement a way to reach that goal.

Make the transfer into savings your first transaction out of your monthly income. This will do two things; it will force you to establish a realistic savings goal, and it will take that money off the table.

There are quite a few automatic savings plans. Your bank could automatically transfer money from your checking account into a savings account or certificate of deposit (CD). You can establish an account with a mutual fund family and do an automatic transfer into a mutual fund. These funds typically have lower minimum account balances for retirement accounts but you can use a fund selector like the one at Morningstar.com to help you find accounts that meet your investment needs.

You could also buy savings bonds using the U.S. Treasury's Easy Saver plan and have the money automatically debited from your checking or savings account.


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Key in all this is to establish what your financial goals are in saving this money. If you're saving for retirement, you'll want to look at investing in a traditional or Roth IRA account, assuming that you meet the income-eligibility requirements for these accounts.

Saving for a short-term goal is a different investment strategy than saving for a long-term goal such as retirement. In general you're more willing to accept risk in your investment when you're investing for the long haul. That means using more stock and bond investments than short-term money market investments when investing long term.

The hardest part of a savings plan for most people is just getting started. You're committed to doing that, and you should be successful by just paying yourself first and putting the money out of sight in one of these new accounts.


-- Posted: March 16, 2003



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