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Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
•
Bankrate.com |
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.
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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