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Ask Dr. Don

Building savings

Dear Dr. Don,
HELP! I can't seem to find anyone who can help me figure out how to save money! I make a good salary, have some debt -- nothing outrageous --- and have literally a few hundred dollars saved. Can you recommend a good book? I'm at a loss as to how to make this happen! It sounds pathetic, but I just don't know how people save money. What's the secret? I want to join the club!
Carol Cache

Dear Carol,
The first secret is that you have to spend less than you make. Do that and you'll find yourself with money left over at the end of the month. You'll want to find a home for that money, and when you do, presto! You've got savings.

Put together a household budget allocating your monthly expenses against your monthly income and see where you stand. Money left over? Then make savings a line in that budget.

If your household budget shows a deficit, however, then you have to change your spending habits to bring your budget in balance including a line for savings.

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Identify some goals for your savings. People make consumption vs. investment choices all the time. You need to give yourself a good reason for why you're putting money aside for the future. Retirement, education and travel are common goals, but try to put a finer point on those goals. When do I want to retire, how much will I need set aside to retire and what do I want to do when I retire are all good questions to ask. Translate goals into actions that you'll have to take to reach those goals.

Start out by building an emergency fund. It should approximate three- to six-months' worth of living expenses. Keep it in liquid investments such as a money market account at your bank. It's more important to have this money readily available in case of a financial emergency then it is to worry about the income earned off how it's invested. Bankrate explains the emergency fund in greater detail.

Another thing you need to know as a pledge member of the saver's club is that some types of accounts give you income-tax advantages. Saving for retirement in tax-deferred accounts such as your company's 401(k) plan or a traditional IRA allow you to invest pretax dollars today, postponing the income taxes due on the contributions until you withdraw the money from the account. In contrast, a Roth IRA is funded with after-tax dollars, but qualified distributions out of the account are free of federal income taxes.

You don't need a book to join the saver's club. There's enough on Bankrate alone to give you a solid grounding in how to invest your savings. Save your money instead!

-- Posted: Aug. 26, 2003

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Emergency fund basics
Financial advice glossary
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