By Andrew Baron, CFP®, EA
The classic saying speaks of the beautiful flowers and warmer weather that follow the dreadful rainy season of April. Cultivating these flowers take time, but are worth the wait as a symbol of sunny warmer weather soon to come. Many of us have a similar outlook on saving, we know it’s necessary but it can be challenging. Like April paving the way for beautiful flowers in May, saving for the future takes time and can be a challenge. However, by building the habit the payoff is well worth it when you accomplish your goals with retirement, buying a home, taking a major vacation, or simply having a nest egg for when the rainy times come back.
Start small! The basic idea to consistently save and grow your money can be daunting. But the habit itself is more important than the amount you contribute. Save whatever you can and over time try to increase your savings. This can be done whenever you run into a little extra money or when you receive raises at work. Even if you aren’t saving as much as you would like to, the next time you come into some extra money, save it! You will appreciate these small sacrifices in the future.
Spending and saving habits become tougher to break as we age, so beginning to save early and build the habit is important. Some people may find this more challenging than others. Automatic bank withdrawals that go into savings may help with those who have a propensity to consume. Let’s look at a simple example like saving for retirement. Nearly everyone knows it’s important to save for retirement, but investing to get there can be a difficult experience because it is a long term goal with no tangible benefit until later in life. For most, this isn’t until their 60s or later. This can be an abstract concept for someone in their 30’s or 40’s because this end goal may seem light years away for them. Stock market fluctuations can be intimidating for many people, which is why dollar-cost-averaging can be such a powerful tool.
For those unfamiliar, dollar-cost-averaging is the process of repeatedly contributing a certain dollar amount every period towards a certain group of investments, such as mutual funds or stocks. Sometimes you buy when the price is up and sometimes you buy when the price is down. However, over time, the investor averages out. This can alleviate apprehension about market timing and analysis-paralysis.
Continuing with retirement accounts, taking advantage of employer matching can be a boost to your savings. Commonly, employers will match funds employees contribute to their retirement accounts. These often have a participation rate and a cap on the maximum amount. This may be along the lines of 100% of the first 4% contributed and 50% of the next 4% contributed. This would mean for the employee to receive the full 6% employer match, they must contribute 8%. This may be more than the employee would save on their own without the match, but the reluctance of saving more is overcome by the immediate reward of a higher contribution.
By developing a spending plan and prioritizing saving, you should be prepared for when things are rainy and difficult, and able enjoy yourself when times are sunny and bright!