Resolutions 2012 – 4 Steps to Saving More

Americans don’t save like they used to, but they may be realizing it’s a good idea to start.

Historical data from the U.S. Bureau of Economic Analysis shows the personal savings rate – the percent of disposable income we don’t spend – was 7 percent at the start of the ’90s, but dropped as low as 1.5 percent by 2005. The recession brought it back up above 5 percent, where hopefully it will remain.

Saving more is often among the most popular New Year’s resolutions, and if it’s yours too, Money Talks News founder Stacy Johnson has advice on getting started in the video below. Check it out, then read on for more.

Like Stacy said, saving more isn’t about getting a big raise or changing your entire life. It’s about taking step after step toward getting the things you care about. Here’s how you do it…

1. Step 1: Set a specific goal.

As we explained last week in Resolutions 2012 – Budgeting Your Way to Happiness, the best way to prioritize long-term goals (getting out of debt, buying a house) over short-term ones (eating out, seeing a movie) is to come up with something compelling and make it as specific as possible. If you don’t map out your road to success, you’re bound to make a wrong turn somewhere. Here’s the example we gave the other day: “By Jan. 1, 2013, I will have $25,000 saved, so I can make a 20 percent down payment on a house that costs $125,000.” Notice the end date and the fixed amount – no wiggle room.

Choose something that fits your priorities and finances; an emergency fund adequate to pay all your bills for at least three months is a good place to start. According to CareerBuilder, 42 percent of workers live paycheck to paycheck – and that includes many people making six figures!

2. Step 2: Pay yourself first.

A common approach to saving is “keep what’s left at the end of the month.” If you’ve ever tried it, you know it doesn’t work well – there’s rarely anything left. Try this instead: Treat your goal like your most important bill. Think of it as money you owe yourself, due on a certain date.

Want to make it even easier? Enroll in the retirement program at work and have the money taken out of your paycheck automatically. You’re less likely to miss what you never see in the first place. This is an even better idea if your employer matches your contributions – free money! And if your employer doesn’t have anything like a 401(k) program, you can still automate a regular transfer to savings through your bank account. Pretty low interest rate, but a penny saved is still a penny earned.

3. Step 3: Find extra money.

As Stacy said, saving soon is more important than saving big. If all you can squeeze into savings is $25 a month, start there. Then learn the 10 Golden Rules of Saving on Everything so you can find extra cash.

Next, look for more savings by adjusting your spending plan – if your grocery budget is high, check out 28 Tasty Ways to Save on Food. Got a gas guzzler? We’ve got 28 Ways to Save on Gas. You can cut down your bills too – check out 6 Easy Ways to Save Energy and 3 Steps to Cut Your Cable Bill 90 Percent. Whatever the budget item, there are savings to be had which you can put toward your goal.

Think about all the little fees you pay, grumble about, and then forget on a daily basis. Come up with ways to nickel-and-dime yourself to wealth: When you tip a waitress, tip yourself. When you pay your bills on time, save the avoided late fee. Charge a few quarters for a load of laundry, even if the washer doesn’t. Buy one, get one free? Pay for the second, into savings.

4. Grow big.

You work hard for your money, but when you save, your money works hard for you – if you put it in the right places.

Here’s a scenario to demonstrate the miracle of compound interest: Say you save $150 a month. Do that for 20 years without investing it and you have $36,000. That’s not chump change, but look at what you end up with at various interest rates…

• At 2 percent – $44,219
• At 5 percent – $61,655
• At 10 percent – $113,905
• At 15 percent – $224,586

But before you start salivating, realize those returns won’t happen without real risk – 10-year Treasury bonds right now yield below 2 percent, and looking at our savings search tool, you can’t even earn that rate on a five-year CD these days. That basically leaves stocks. New to the idea? Educate yourself. You can start by checking out 5 Tips for Young Investors and What to Know Before You Invest in Stocks.