How to Save

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The most important personal finance principles for saving money are these:

Put your savings on auto-pilot

Your savings are not what is left over each month after spending. Budget your various savings goals on a par with any other expense such as rent and car payments.  Then automate them as you should with most of your other monthly payments by automatically routing your savings to the appropriate account with online bill payments, auto drafts from checking, etc.  For example, setup automatic drafts to your IRA, college 529 account, emergency fund, vacation, and home down payment account, etc.  See more information in this post.

Save early

The earlier you start savings towards your goals, the longer you savings will have time to compound and grow.  Compounding your savings means your interest or dividends will soon earn more interest or dividends thus enabling your savings to grow even faster.  This is why even a small amount of early savings grows faster than a larger amount of savings started later.

Invest your savings based upon your time-horizon

As we discussed in “Risks versus Rewards”, where you put your savings depends upon how soon you need it.  So savings you won’t need for a long while (five or more years) should be mostly in stocks and stock funds.   These savings will grow the most and you don’t care much during the inevitable period when they go down, because they historically come back up within five or less years.  In contrast, savings you may need in the near term, such as vacation and emergency funds, should be someplace really safe.

2 thoughts on “How to Save

  1. Pingback: Highlights from 100 Posts for Managing, Saving, Investing, and Spending Your Money Managing your money, Personal Finance Keys » Financial Guide to Life

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