Savings is the foundation of what I work with my clients on. It may take many forms such as retirement savings, college savings, wealth transfer, executive compensation strategies, or emergency savings but all roads started with saving. I’ve said it many times as my father said to me: “When it comes to saving start early and often.” As he would say this to me in my younger years it didn’t resonate what exactly he meant by this saying, it seemed as if he was just telling me to start saving as early as I can as many times as I can. However, as I’ve sat back and helped thousands of individuals and families over the years look at planning for their financial futures it all came full circle: what I’ve come to understand is that if you start earlier and make it a habit you will have time and compounding on your side. So, in today’s considerations with college debt, sandwich generational concerns and other obstacles to overcome the question of how can I save or can I save enough regularly can present itself. Here’s 5 simple things to help start or get your savings a boost.
1. Automate your savings
One of the obstacles to saving is the actual act of having to save. Now I know that may seem a little confusing, but the difference between having to actively move money from a spending account to a savings vehicle versus having that money automatically move can take the temptation to spend away. In addition to the spending splurge that it can avoid, it also reinforces healthy budget habits and the effect of compounding interest or dollar cost averaging. These features can be compounded even further when you automate your retirement savings with an employer match. What does this all mean? Compounding interest has been referred to as one of the most powerful forces that exists and it is one that works for us or against us depending on where we find it: in the case of savings it helps our savings to grow, in the case of debt (e.g. credit card interest) it can compound (or grow the balance on itself) that debt. With compounding interest lets say that someone saves just $10 a week over a 52 week year: that’s $520 in savings that has been contributed into the savings from a paycheck. However, since the money is making interest and/or having the ability to grow in the market the savings at the end of the year is higher; take these for example: with 3% interest our $520 in savings would be $527.21 by the end of the first year, and $1,070.46 by the end of year 2, with 7% interest the figures would be $537.90 and $1,113.02 respectively for years 1 and 2. But there’s more: what about if this is a 401k plan where a match comes from your employer? Assuming that in this case due to the lower dollar value the employer matches at least 50% of your contributions your results would be as follows: with 3% interest, at the ends of year 1&2 you would have $790.81 & $1,605.68 with your contributions only totaling $1,040 by the end of year 2. With the same savings scenario but an interest rate of 7% with the previously mentioned company match $805.52 and $1,669.27 are the respective year 1 and 2 balances. So on a smaller scale you can start to see how these can add up vs the small impact of $10/week that we are carving out in these examples. When we want to see the true power of the company match and compounding interest lets take $10/week with the 50% company match for 35 years and see what they would do with 3%, 7% and 10% average rates of return: at 3% for 35 years $48,201, 7% for 35 years: $117,068.55; and 10% for 35 years: $246,781.47! Assuming $10 is easy enough what would $20 a week become with all the same variables of an employer match, compounding interest and the same 3%, 7% and 10% rates of return? At 3% for 35 years $96,403.28; at 7% $234,137.10; and at 10% $493,562.95!
2. Get the most from your savings
As you save (and hopefully you are automating after reading our first tip) why settle for money under the mattress? It is always a best practice to periodically review your financial health and ensure that you are in the best position for success. Part of this evaluation should pertain to your investment portfolio as well as your banking. The changes in the banking industry with online banking taking a firm footing have helped to drive very competitive interest rates. I always recommend that clients shop both credit union and online banking for best rates against the larger corporate banks. You would be glad to add some interest to the equation in order to get the most from the money you are putting to the side. Its also important to factor in what your needs as well as goals are to see if these will be enough for you, a holistic financial plan that can factor in varying market conditions, inflation and potential taxes against your savings can be run for you by a financial professional.
3. Track your spending
Its as important as anything to know where your money is going, and these days it doesn’t take a bookkeeper to tally things up. Thankfully, many banks have integrated budgeting/spending tools internally allowing you to see where your spending habits are and where they’ve been historically. In addition, they can be a great resource to set budget alerts to warn you when your spending gets off track. If your bank does not have this feature built in there are many other apps that can help to achieve this for you and they are simple to set up without any fees. We offer a tool in our complimentary Client Portal that anyone can register for where you can get a better oversight on your spending, net worth and explore many different goals!
4. Seek areas to save on your bills
Have that gym membership that hasn’t been used for a year or two? How about the subscription box or app subscription that hits your account every month? These all may seem like smaller line items but if you took a few of those off your plate they could add up – and add cutting down other bills like cable, insurance or other reoccurring debits that can be shopped around and you would be surprised how much they can add up! This area goes hand-in-hand with tracking your spending, once you’ve done that you can identify some of these areas that can lead to additional savings!
5. Create a Budget… (and stick to it!)
This may seem like the most obvious step to take but you’d be amazed how often it is not done! You cannot manage to what you do not measure, and without a budget that you commit and stick to it becomes increasingly difficult to achieve financial success. This also will be the yardstick to determining things such as your emergency fund (regularly 3-6 months of expenses). With a budget in place you will also have clarity and in many cases feel more freedom knowing exactly how much goes where on a month to month basis.
How to Get Started:
It never too early or too late to get started! If you are interested in speaking with a Financial Planner here at Coastal Wealth Planners you may choose from the following:
You can always reach us by phone as well at (732)554-1099 or [email protected] .
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