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The high price of waiting to save

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After a long, cold winter, many Americans are thrilled to finally greet the spring. The season is a time of renewal and hope. Such optimism makes spring the perfect time to pledge a new commitment to saving more money. The green shoots you plant in your bank account today can be the towering oaks of financial security somewhere down the road.

Yet, for millions of Americans, saving money seems like an impossible task. Even when we have cash in our pockets, it does not stay there for very long.

You might think you cannot afford to save — but in reality, you cannot afford not to save, says J. Douglas Wellington, associate professor at the School of Business and Management at Husson University in Bangor, Maine.

Saving even a little bit of money now can make a big difference in your retirement security, Wellington says. He expands on those thoughts in the following interview.

People today feel financially strapped. Many are unemployed, others are underemployed and millions earn just enough to make ends meet. What would you say to people who want to save but believe they can’t afford to do so?

Although you might think you cannot afford to save, you really cannot afford not to save. If you are 25 years old, your life expectancy is about 80. If you work until the Social Security retirement age of 67, you will be retired for 13 years, on average.

You do not want to rely solely on Social Security. The Supreme Court has determined that Social Security is not a contractual right (in Flemming v. Nestor). Therefore, Congress can change eligibility and benefits at its discretion.

So you should plan to save for retirement. You should start as early as possible. For example, if you can get an 8 percent return and invest $1,000 a year for just 10 years, and wait 35 years to withdraw your money, you would have saved $214,189.

If you wait 10 years to invest, and then invest $1,000 a year for 35 years, you would have only $172,316.

You can start off modestly. There are mutual funds that will accept a minimum investment of $250. Most people should be able to put aside at least $5 a week and could invest in such a fund within a year.

Some funds feature a lower minimum investment if you agree to make monthly investments for a certain period of time. There are many alternatives for small investors.

Interest rates remain at all-time lows, making it hard to find a decent return in CDs, savings accounts and other “safe” places. What tips do you have for people searching for more yield while maintaining safety?

For people just starting out, I suggest investing in an index fund or exchange-traded fund (or ETF). These funds invest in a broad-based selection of stocks, which minimizes risk.

At a relatively low cost, you can receive the benefits of a market return. The market has averaged a return over 9 percent for the 10 years from 2004 to 2013, based on the S&P 500, which represents about 80 percent of the value of the U.S. stock markets.

However, you must invest for the long term. There have been years of both increases and decreases of more than 30 percent.

Some people have a knack for saving. What do the best savers do that the rest of us are forgetting to do?

The best savers are those who have a plan for periodic investing. Have money deducted from your paycheck and invested in a 401(k) or an individual retirement account (or IRA). You learn to live without that money and your savings grow.

Additionally, if you invest a certain percentage of your paycheck, you invest more each year as your wages increase.

On the other hand, many other people struggle to save and seem unable to succeed. What are some of the biggest mistakes people make when trying to save?

The three biggest mistakes people make are trying to time the market, not diversifying and ignoring the effects of inflation and fees.

Many people put their money in the stock market when the market is increasing in value and get out when the market is decreasing in value. In other words, they buy high and sell low.

Investors often put their money in only one or two investments. If that investment fails, the person has lost most of his or her money. The worst strategy is to put all your savings in the company for which you work. If the company has financial difficulties, you can lose both income and savings.

You must plan for the effects of inflation. A conservative investor might invest in three-month Treasury bills and feel happy with a 1.56 percent annual return for the past 10 years.

However, inflation, as measured by the Consumer Price Index, increased about 2.38 percent annually during that time. Therefore, a seemingly conservative investment would have resulted in about (a) 0.8 percent decrease in purchasing power annually for 10 years.

Finally, you also need to be aware of fees. One of the advantages of an index fund for beginning investors is relatively low management fees.