Importance of Saving
There are many things
to consider when saving for the future. The most fundamental factors are
to save early and save more. No one can control interest rates or accurately
predict what will happen in the stock market. The two things you can control
are when you start and how much you save.
Starting to save early
puts time on your side. Your savings will add up and the longer your funds
are working, the longer the power of compound interest will work in your
favor. You earn on what you have saved and you earn on what you have already
earned. Consider the Rule of 72 - the value of money about doubles when
the interest rate times the number of years equals 72. An initial value
doubles in 12 years if you earn 6% and doubles in about 14 ½ years
if you earn 5%.
Establish a Consistent
One of the easiest ways to establish a savings habit is to participate
in your employer's 401(k) plan. Funds are withheld from each paycheck
and deposited into your account. In addition, if your employer matches
part of your contribution, you accumulate even more. A second way to consistently
save is with an automatic savings transfer program with your financial
institution. You decide how much and when you want funds transferred from
your checking account into a savings account. You can also use a payroll
deduction plan from your employer and get the same results.
Along with how much and how often you save, what you earn on your funds
will determine how fast your money grows. You can not control what happens
with interest rates or the stock market, but you can consider different
types of savings vehicles that provide different returns. The simplest
of these is to consider buying certificates of deposit (CDs) instead leaving
funds in a savings account. CDs usually offer higher interest rates, but
they are time deposits and have penalties for early withdrawal.
If you can accept
not having immediate access to your funds, CDs can be an attractive savings
A final smart saving
idea is to use a regular IRA. You can establish a regular IRA regardless
of your income and regardless of whether you are eligible to participate
in your employer's qualified retirement plan. For 2010, you can contribute
up to $5000 or $6000 if you are 50 or older. One of the benefits of IRAs
is that earnings within the IRA are tax deferred. This has the effect
of increasing your earnings. You delay paying taxes until you withdraw
the funds and there is a penalty if you withdraw the funds before you
reach the age of 59 ½.