There are several concepts that should be seriously considered when you are thinking about how to accomplish your saving goals.

1. Start saving as soon as possible. In an article in The Wall Street Journal (4-5-88), the manager of work-force education for the American Association of Retired Persons (AARP) made the following statement: “Ideally, retirement planning should begin with your first paycheck.” We strongly agree with that statement.

The reason to start saving as soon as possible is to attain the maximum benefits from the power of compounding. The following example should be helpful in illustrating this point:


· Mr. A invests $2,000 a year in his IRA account for six years, beginning at age 22, and then stops making additional investments.

· Mr. B spends $2,000 a year on himself for six years and then starts investing $2,000 a year in an IRA account for the next 32 years, beginning at age 28.

· Both Mr. A and Mr. B earn 12% a year on their IRA account, which is a very optimistic assumption.


· Mr. A at the age of 60 has approximately $683,000 in his IRA account after having invested a total of only $12,000. (However. if he had invested $2,000 every year for the entire 41-year period, he would have had more than $1.7 million, based on the same optimistic assumption that he earns an average of 12% a year.)

· Mr. B at the age of 60 also has approximately $683,000 in his IRA, but he has invested a total of $64,000, which is $52,000 more than Mr. A invested.

Although the previous discussion focuses on saving for retirement, the same principle is applicable to saving for all types of long-term financial goals.

2. Save consistently. Few people will save as much if they do not save systematically as they would if they do save systematically.  Without a systematic savings plan, people tend to spend more money and save less money.

The secret to being able to save consistently is twofold:  Learn to live at least somewhat beneath your means, and think of saving as a regular claim on your earnings each month, just as your payments for your rent or mortgage.  A good way to ensure systematic saving is to have a budgeted amount of money automatically transferred each pay period from your checking account into your savings or investment account.

[For an additional discussion of the concepts of starting to save as soon as possible and saving consistently, click on  “Save A $Million.”]

3. Be aware that a dollar spent today takes multiple dollars out of future savings.  The total cost of money that is spent is much greater than it seems to be, because future savings are reduced by not only the loss of the money that is spent, but also by the amount that could have been earned on that money.  For example, over a period of years, if a family spends an extra $50,000 to purchase new cars rather than previously-owned vehicles, their total savings could  be reduced $100,000 to $150,000.

An article in The Wall Street Journal (9-2-97) indicated that to be a successful investor, controlling spending is at least as important as choosing the right investments.  Spending less and saving more will definitely increase the value of an investment portfolio, whereas choosing investments that perform well is highly uncertain.

4. Be reasonable about your saving goals.  Try to be fair to all of the members of your family when you are determining how much to save.  If you set your saving goals too high, you may unnecessarily deprive members of your family of at least some of the things that can enrich their lives.  On the other hand, it may be necessary for everyone in the family to make financial sacrifices to attain the levels of savings that will be necessary to meet the family’s long-term financial goals. [To learn how to calculate the amount of money that you and your spouse are likely to need to supplement your other sources of retirement, click onSufficient Savings.”]

5. Be aware that a penny saved (i.e., not spent) is generally worth substantially more than a penny that is earned. The reason is that most people must pay taxes – federal, state, and social security – on earnings, but they do not need to pay any taxes on the money that they have saved, although taxes will have to be paid on any earnings from those savings.  Therefore, people benefit considerably more from finding ways to reduce their spending than they do from getting a pay raise for the same amount.

6. Avoid being fooled into thinking that you are saving money when you are actually spending it. Spending itself, even when you get a bargain, does not necessarily add to your savings. Money “saved” from a bargain purchase needs to be placed in a savings or investment account for there to be actual savings.

In conclusion, we encourage you to begin immediately to develop a satisfactory saving plan.  The sooner you start, the greater will be the benefits for you and your family.