How
Can I Save Money Fast?
Author:
Gary Foreman
Question:
Help! I am 50 with no savings!! How can I start? Need any and all advice.
Thanks, Dinah
Answer:
Dinah sure has a lot of company. Recent Congressional research showed that
only 40% of workers have a plan in place for retirement. Even among those
over age 55, only 47% had retirement accounts. And the median value of the
account was less than $25,000. So a lot of people need to begin saving for
retirement.
The
first step for Dinah is to try to get an idea of how much money she'll need.
If she's among the two thirds of Americans and Canadians who expect to continue
in her current lifestyle after retirement, she can expect to need about 80%
of her preretirement income. That's a surprise to many people.
Where
will she find that much money? Dinah should begin by finding out about any
existing plans she may have through past or present employers. Even if she
doesn't have any private company pension, she'll be eligible for social security.
Once
Dinah has some idea of how much income she'll need and what's already available
she can calculate how much additional she'll need to provide. For illustration,
let's assume that she'll need an extra $10,000 in income each year.
How
much will she need to save to get that income? We could go through a lot
of discussion and complicated formulas. Whole books have been written on
just this subject. But for our purposes, I'd assume that Dinah should be
able to safely get about 7% in income from her savings each year. That's
a realistic, conservative long-term rate.
To
find out how much savings will be required to generate the income, just divide
the income desired ($10,000) by the rate of return (7% or 0.07). In this
case Dinah would need about $143,000 to produce $10,000 in income each year
after retirement if it earned 7%.
So
how does Dinah begin to save that much money? Much of what she'll need to
do is the same as if she were beginning any saving program.
Begin
by setting some goals for her savings. Can Dinah manage to save $5 each week?
Begin with something simple. She might not know where to find an extra $5.
She'll need to take a look at her habits and see what she can change that
will make $5 available each week. It will almost certainly require her to
change some habits.
Start
today. Even if she can only save 50 cents this week, that's better than nothing.
And if she does the same or better next week a new habit will be starting.
Sure, more is better. But actually saving 50 cents is better than complaining
that you can't save $5.
Once
Dinah begins to save some money she'll need to decide where to keep it. Here
the goals are safety and growth.
Begin
with a separate saving account. Once Dinah has put money into the account
it should stay there unless she's moving it to an investment account that's
earmarked for her retirement.
After
she has accumlated some money in the savings account she should periodically
move some of it to a no-load, growth mutual fund. There are a number of excellent
ones available. Historically a fund of this type will earn nearly 10% per
year over the long haul.
Dinah
should contribute to a tax deferred retirement plan. If she is eligible for
a 401k plan she should sign up. Also begin contributing to an IRA. Her money
will grow much faster if she doesn't have to pay taxes on the earnings each
year.
Dinah
should learn some of the investment basics. Your potential risks and rewards
differ with various investment choices. Learn the differences and which would
work best for you. It's really not that complicated. The important investment
concepts are easy enough to understand. There are local adult ed classes,
online courses and even books that can explain the basics.
Dinah
is smart to get started now. Yes, earlier would have been better. She might
have started too late to guarantee a comfortable retirement. But she can
still make a significant difference in her future standard of living.
About
the author:
Gary Foreman has worked as a Certified Financial Planner and currently
edits The Dollar Stretcher newsletter and website www.stretcher.com.
