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Saving for a lifetime: 5 concepts

Dear Money Matters,
I am a recent college graduate and have just entered the job market. I wanted to start saving immediately. My question is: How should I go about it?
B.J.C.

Dear B.J.C.,
First off, kudos for your foresight. All too often, recent college grads come out of school with credit cards swinging, looking to reward themselves for finally freeing themselves from the reins of academia. Granted, a job well done deserves some sort of reward, but all too often that sets young people on a bad track of spending and no saving. So, while I hope you treat yourself, you're smart by looking at the other side of the financial formula as well.

Because I don't know your long-term goals, a specific answer would be inappropriate. But I can offer five global thoughts on saving:

1. Be as systematic as possible
We all start worthwhile projects with resolve, only to pull back later when circumstances change. That's particularly true in saving: One dented fender or one vacation you can't possibly pass up later, and our determination to save vanishes. That's why it's important to make your saving as automatic as possible. There are several ways to do that. First, follow the maxim, "Pay yourself first." Before you tackle your monthly bills, contribute to your savings. Look into an automatic withdrawal program where you bank, so money is removed automatically from your account and invested. That really puts your savings plan on autopilot.

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2. Know yourself
No savings plan in the world, no matter how carefully thought out, will work if it goes against who you are. So look at yourself and your goals to determine what savings program will work best for you. For instance, if you're conservative, don't invest in an aggressive stock or mutual fund -- you will lose sleep and bail out at the worst possible time when the fund or stock drops in value. Be as thorough in determining your savings goals -- a trip around the world 10 years from now is going to mandate a more aggressive saving and investing strategy than, say, a retirement 40 years from now.

3. Don't be too timid
This is a common mistake. Savers who think they have all the time in the world may opt for unduly conservative investments that, while perfectly safe, don't offer an adequate return. For instance -- investing in a one-year certificate of deposit paying 2.5 percent may seem a solid choice, but not if you take a 3 percent inflation rate into account. That turns the CD into a money-losing proposition, which is akin to throwing your money into the air and hoping it somehow self-replicates on the way down. It's critical to set your investment goals, understand the amount of money they'll require and establish both the amount and type of investment plan that meets those objectives. Being too gun-shy, no matter how safe it makes you feel, often won't get you there.

4. Check your age
One of your biggest advantages is your age. Statistically, you have a long time to reach your goals, so you can take a longer-term view. For instance, if you want to be particularly aggressive, a high-risk mutual fund may be a suitable choice, since you have time to ride out any short-term corrections and profit accordingly. Another investor without that time cushion can't afford to be that aggressive. So bear your youth in mind when setting both your goals and the ways to get there -- if you're comfortable with it, a little risk may pay off handsomely down the line.

5. Save where you work
If your company offers a 401(k) or similar plan, try to take as much advantage of it as you possibly can. It's easy to set up, saves you on taxes since your contributions are withdrawn before they're considered income and can be particularly attractive if your plan offers any sort of employer match. Funds in a 401(k) grow tax-free until you start withdrawing the money. One tip to help you max out your 401(k): Rather than set a dollar amount for contributions, have a percentage of your salary withdrawn. That way, as you get raises, your 401(k) contributions increase automatically.

-- Updated: March 20, 2003

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See Also
How to get financially fit before retirement
Don't put investing eggs in one basket
Checking out your investment plan

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