Jonathan Clements is one of the personal finance writers that I most admire. ( Others on my top 10 list include Eric Tyson, Jereme Grantham, John Bogle and Burton Malkiel) He is now the Director of Financial Education at Citi Personal Wealth Management. On CitiGroup website (https://online.citibank.com/US/JRS/pandt/article.do?ID=JC6&cmp=emc-5025&publisher=CBOL&venue=citibank.com&placement=Seven%20Strategies%20Read%20More%20-%20Primary&adtype=null&product=5025_CBNA_2011_March_Customer_Updates_and_News&promotion=4634&blitz=null&Prospect_ID=FF408B1FDF9245BC8CBF3AB81DB707E2) He wrote a topic on saving strategies that make sense to me. Here is my take from his points:
If you're looking to amass a large nest egg, it is helpful to earn good investment returns. But what you really want are good savings habits. After all, for healthy investment returns to mean much in terms of dollars and cents, you need to have a decent sum invested.
Indeed, when you first start saving and investing, your nest egg's growth may seem discouragingly slow. But if you commit to saving 12% to 15% of your income every year for maybe 15 years, you should reach the point of critical mass. Suddenly, in many years, your investment gains may dwarf the amount you save and your portfolio could start growing by leaps and bounds.
The tough part: You need to persevere until you reach this tipping point. So how do you get yourself through the initial, less-rewarding years? Start by acknowledging two key issues:1. Realize that spending is often disappointing. You buy the new shoes or the new stereo that you hankered after, only to find that your delight may quickly pass and you are soon lusting after something else.
2. Recognize that delaying gratification isn't easy, so you need to force yourself to save. Focus on saving first and then pushing yourself to live on whatever remains. As soon as you get paid, try to sock away a chunk of your salary. You will then be free to spend the remaining money as you wish, without worrying about some silly budget.
This "save first" approach might strike some as a little rough, but the sacrifice involved will likely be modest. Here are seven strategies that will help you save more.
- Sign up for payroll deduction into your employer's 401(k) plan, investing at least enough to get any matching employer contribution.
- Compel yourself to invest every month in mutual funds, by setting up automatic investment plans, where money is pulled out of your bank account and invested directly in the funds you choose. Some fund companies will waive their regular investment minimum if you commit to investing automatically. Be warned: A periodic investment plan, such as dollar-cost averaging, doesn't guarantee you'll make money.
- Next time you receive a pay raise, increase your 401(k) contribution and crank up your automatic monthly fund investments, so your pay raise doesn't end up entirely as extra spending.
That won't just make your portfolio grow faster. It will also make it easier to retire, because you're used to a more frugal lifestyle.
One rule of thumb suggests retirees need 75% or 80% of their pre-retirement income to maintain their standard of living. But if you are saving a big chunk of each paycheck, you are clearly accustomed to a more modest lifestyle—and you might be able to retire comfortably with just 50% or 60% of your pre-retirement income.
- Boost your monthly savings rate by making extra-principal payments on your mortgage. You likely write that mortgage check every month anyway, so it is no great bother to make the check a little larger.
- Turn loan payments into extra monthly savings. Just made the last $400 monthly payment on your car? Keeping writing that check every month—but instead send it off to one of your funds. You are used to living without the $400, so it shouldn't be any great sacrifice to save this money.
- Make it a rule that you will save all financial windfalls. These windfalls include things like overtime pay, tax refunds, money from a second job, medical-insurance reimbursements, inheritances and year-end bonuses. Such sums aren't part of your regular income, so they are a fairly painless source of extra savings.
- Mentally declare certain assets off limits. For instance, you might freely spend whatever is in your checking account, but you don't allow yourself to touch your savings account, stocks, retirement accounts and home equity.
