A 2015 “America Saves” poll by Fidelity Investments found that many people underestimate the value of saving an extra $50 per month over a 25-year period. Fidelity says that money could accumulate to more than $40,000 because of compound interest and potential market growth.
“The value of time is the most important factor because even if you start saving in your 40s or 50s, you can never make up for lost time,” says Sacha Millstone, a wealth manager at Raymond James & Associates in Denver and Washington, D.C.
Here are five strategies to build your savings in little ways.
Many people think they will save more once they make more money. But the best way to save is to start early and get in the habit of saving.
“The key thing, particularly for young people, is that making even a little progress toward saving money today can make a significant difference 35 years from now,” says John Sweeney, executive vice president of retirement and investing strategies at Fidelity Investments in Boston.
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Save 1 percent of your earnings monthly
Setting aside a small, incremental amount of your earnings will help you slowly build savings. One way to do that is to trick yourself by budgeting less than what you really earn.
“If you’ve recently started your first job, it’s a great idea to budget as if you’re earning just 85 cents on the dollar and put away the rest,” Sweeney says.
Here are some suggestions from Fidelity to find the cash to save a bit more:
Share baby-sitting duties with friends instead of paying a sitter.
Turn off your lights and appliances to lower your electric bill.
Take advantage of coupons, as well as senior, student or veterans discounts.
Plan a “staycation,” or vacation in the offseason.
Allocate your savings on a loan refinance into your retirement account.
Sign up for employee perks such as pretax public transportation programs or a health savings account.
Put yourself on a cash allowance, especially if you’re prone to impulse buys.
The best thing you can do is have part of your paycheck automatically deducted into a savings account or set up a regular transfer of funds, says John Rosenfeld, head of everyday banking at Citizens Bank in Boston.
“Putting aside money in a 401(k) is even easier because those are pretax dollars that you never see,” Rosenfeld says.
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Contribute to a retirement account
If your employer offers a 401(k) or a similar plan and matches contributions, be sure to contribute up to the full employee match. Otherwise, you’re leaving money on the table, Millstone says.
For most young people, a Roth IRA or Roth 401(k) makes the most sense for retirement savings because the money will never be taxed again after being placed in the account.
“Even if you don’t have a company-sponsored retirement account, you can open your own IRA,” Millstone says.
“One key element to the equation in retirement savings is how you allocate your investments,” Sweeney says. “You need to assume some risk and exposure to stocks in order to grow your savings. For young people, 90 percent of their money should be in stocks, but when you’re closer to 65, you should allocate more of your money to fixed-income investments.”
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Long-term saving, not for retirement
If you’re saving for another long-term purpose other than retirement, Rosenfeld suggests a certificate of deposit or a separate money market account or savings account, primarily to compartmentalize the money so you don’t spend it.