Pay Yourself First

Assume that five of your friends decide to save weekly. They each save $1 per day more than the previous person. Assume that they deposit their money in a savings account that pays 5% annual interest. The chart below shows the value of each person's account after 10 years.

It is easy to see that saving just a little more each day or week makes a big difference over time and can help you achieve your goals.

Many times people think that they don't have enough money to save anything. As a result, they postpone a regular savings program. Though it sometimes seems to be the only choice as you pay your monthly bills, the decision not to save can prove to be very costly over the long run. The above savings charts show that the value of interest accumulating over time can be very valuable to you due to the potential your savings has to increase with interest payments.

You may have heard of the concept of "pay yourself first" before—it is the idea that your savings should be treated like a bill that you pay every month. Rather than saving whatever is leftover, determine how much you can save each month and deposit money into your savings account in the same way you pay your other expenses. If you aren't in the habit of saving anything right now, start small. In the beginning, the amount you save isn't as important as establishing the habit of saving. As you make your savings plan, be aware of the impact saving just a little bit more each week or month can have over the long term.

The 70-20-10 rule
One method that you can use work saving into your budget is the 70-20-10 rule. This means you divide your take-home pay in the following way

• You spend 70% on rent, groceries, entertainment and other living expenses
• You save 20% for later spending on larger goals such as a house or car
• You invest 10%

Build over time
Generally, you build an investment program gradually. At first you may have only a savings account at a bank or credit union. Later, as you become more comfortable with your savings and investment habits, you might add a U.S. savings bond, a certificate of deposit or mutual funds to your investments.

  [ Next ] Saving Tips