Building Up Savings Rates is a Life Long Process

Building Up Savings Rates is a Life Long ProcessPeople can easily be intimidated by the amount of money it takes to fund retirement. However, it all becomes more manageable if you approach building your savings rates the way you would build muscle in a gym — starting with moderate exercises, and then increasing the intensity as your ability increases.

Fortunately, life makes this process of ramping up seem natural, by placing savings tasks along the path of life in order of difficulty, starting with some easy ones:

  1. Saving your allowance. When do positive savings rates begin? For many people, the first transition from spending immediately to setting aside some money happens during childhood when they receive an allowance. This will generally be for a modest, short-term goal, but the fundamentals of positive savings rates are there — chiefly, budgeting and deferred gratification.
  2. Saving for a car. Moving from childhood to young adulthood, often the first meaningful savings goal on the horizon is to save enough money to buy a car. This will typically represent an investment in the thousands of dollars, so it will not only take more effort, but also an ability to see saving as a multi-year commitment.
  3. Saving for a house. Speaking of multi-year commitments, this notion really comes into focus when you start saving for a house. This will probably be the first time you’ve bought something that costs much more than you make in a year, so planning has to stretch out over several years. First you have to build savings rates up enough to accumulate a down payment, and then you have to maintain that budget discipline to make sure you meet your mortgage obligations, keep up with your insurance, and maybe even buy some furniture. Saving that down payment might be the first time you accumulate a significant lump sum of money, so for the first time you’ll have to face decisions such as spending time to find the best CD rates, money market rates and savings account rates to get the most out of your savings until you need them.
  4. Saving for college. The next major savings challenge may come when you have to put your kids through school. Is this really a bigger saving challenge than buying a house? It can be. The College Board estimates that for the 2009-2010 academic year, total annual expenses at a private four-year college for a student living on campus were $39, 028. Multiply that by four (all the while keeping your fingers crossed that your child gets through college in four years) and it’s a commitment of $156, 112. Then, if you have more than one child, start multiplying that total. College can definitely be a big ticket item, and given that student loan terms are generally shorter than mortgage terms, it’s at least as tough a challenge as buying a house.
  5. Saving for retirement. The right retirement goal for your lifestyle might be one million dollars, it might be two million, or even more. Still, you have the advantage of time. If you start early, retirement saving has a longer lead time than any of the above savings challenges.

In short, life’s savings challenges grow in size as time goes on, but that’s a good thing. It allows people to start small, and then tackle bigger challenges as they develop better savings habits.

5 Responses to “Building Up Savings Rates is a Life Long Process”

  1. Anonymous

    I think that there are many more key steps in between saving your allowance and saving for a car (depending on your priorities). Many students I know opt to take the bus during their college years in order to save money and put it towards their rent, tuition or books. It seems that all throughout highschool I was saving every penny so that I could move away for college and live on my own. Should parents have to save away for their children’s tuition? My parents paid for my first year’s tuition, and then after that I was on my own. It taught me to save, but it was also very stressful having to work and go to school at the same time.

  2. Anonymous

    The setting of goals and completing them. Focusing on one at a time with all your energy is necessary for success. Breaking down your goal into mini goals really helps me complete them. I am paying off my debts now and should be done by next summer. Then I’m taking that money and putting it all into retirement. One by one I’m tackling my goals. I’ll be saving a little at first then incrementally stepping it up. Till I’m putting away large amounts.

  3. Anonymous

    I think it’s amazing how much saving one’s allowance as a child influences behavior as an adult. My grandma always made me save my allowance (at a rate of between 50-100%) and as an adult, saving comes naturally to me. My husband, on the other hand, was never made to save as a child. As an adult, he finds things like budgets and savings rates to be more suggestion than rule.

    I’ll keep this in mind when it’s time to get our son to start saving his allowance. It seems to be an important part of childhood!

  4. Anonymous

    I think early and written plans are helpful, too. Avoiding debt and either tackling one at a time aggressively or two at a time (reality for me is attacking multiple ones at a time) may help. And snowballing the savings as you reach goals can be a great way to supercharge your savings (all with a written plan, of course).

    For example, we have a 1-year-old. The plan is to have him save allowance as soon as he gets it (4 categories, spend, save and give (the fourth is coming up)) and save up for something “big” like a bike in the 4th category. When he gets to the bike, hopefully we’ve shown him that he will need money for a car and offer to match savings if he puts his “bike” savings into a “car” fund because he already has the bike. Once he gets the car, we will help redirect that money to something more (college (on top of our 529) or a house fund for when he gets older). That’s our plan for now. It can be just as effective as a snowball to pay off debt but in the opposite direction, in our opinion.

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