Financial New Years Resolutions
One of the top “new years resolutions” has been to save more money in the new year. In today’s economy, it can be difficult to carve out a portion of your paycheck to save for later. With the regular monthly expenses, one would wonder how or why should I save when I have credit card bills or other debt that demands money every month. Wouldn’t it be better to work on paying off the loans? Well, maybe, but maybe not. That’s for a later blog. However, consider paying yourself first instead of the creditors. I didn’t say “don’t pay the creditors.” I only suggested that you pay yourself first and then the creditors.
Often folks are amazed at the amount of money that they can accumulate in their company 401(k) plan. They’re also amazed how quickly the account grows. It’s not so surprising to see an account double and even triple in a few years. Why? How?
There are two key elements to the amazing growth of their 401(k) or any other systematic savings plan. You may have guessed the first one by saying, “add more and more money”. Well of course, but how you add more and more money is the key. Note the key word, systematically. This means that you commit to adding money on a regular basis. For example, consider adding money every 1st of the month or every pay day. Systematically having money going into an account forces you to be more committed to saving money for a later date. When you are saving money automatically, you are systematically saving. Most folks say that when it’s automatically taken from my paycheck or from my checking account, after a while, they don’t even miss it.
Secondly, the key to the success is that in most 401(k) plans, they offer investments (typically mutual funds) that fluctuate in share price. By committing to systematically save, you will buy shares every period. Those share prices will be higher or lower every period. When the price is lower, you buy more shares. When the price is higher, you buy less shares. This is called, “dollar cost averaging”. It truly works.
Whether you’re saving for a college education, retirement, or just trying to build up some cash for later, dollar cost averaging and a commitment to systematically save can be the two biggest keys to produce bigger results over time.
Pay yourself first . . and start today!
image credit: ell brown