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:

   Assume:

   • 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.

   Results:

   • Mr. A at the age of 60 has approximately $683,000 in his IRA account after having invested a total of only $12,000.

   • Mr. B at the age of 60 also has approximately $683,000 in his IRA, but he has invested a total of $64,000.

   Although the previous discussion focuses on saving for retirement, the same principle is applicable to saving for all types of long-term financial goals. [For additional discussion of the concept of starting to save as soon as possible, please see our article entitled "Save A $Million."]

2. Save consistently. Few people will save as much if they don’t save systematically as they would if they do save systematically. Without a systematic savings plan, people tend to spend money rather than save it.

   The secret to being able to save consistently is twofold: Learn to live 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. One 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.

3. Be aware that a dollar spent today takes multiple dollars out of future savings. When money is spent, the cost 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, if over a period of 30 to 40 years, a family spends an extra $50,000 purchasing new cars rather than previously-owned vehicles, the total reduction to their savings could be two or three times as much.

   Furthermore, 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 the investment portfolio, whereas being able to choose investments that perform well is more 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 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 required 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, please see our article entitled "Sufficient 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 payroll taxes -- federal, state, and social security -- on the income they earn, but they don’t need to pay any taxes on the money they save rather than spend. (Of course, taxes will have to be paid on any earnings from those savings.) As a result, money that is earned is usually worth much less than money that is saved.   Therefore, most people would benefit much more from finding ways to reduce their spending by several hundred dollars a year than 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. When you purchase something on sale, you don’t necessarily save money. For example, you won't be adding to the money in your savings account if you purchase items that are on sale, if those items are still more expensive than the items you usually would purchase. Likewise, if you don't really need items that are on sale, you will not be adding to the money in your savings account by purchasing them.

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