The Importance of Saving

The Importance of Saving

There are many things to consider when saving for the future. The most fundamental factors are to save early and save more. No one can control interest rates or accurately predict what will happen in the stock market. The two things that you can control are when you start and how much you save.

Start Saving Early

Starting to save early puts time on your side. Your savings will add up and the longer your funds are working, the longer the power of compound interest will work in your favor. You earn on what you have saved and you earn on what you have already earned.

Establish a Consistent Saving Habit

One of the easiest ways to establish a savings habit is to participate in your employer's 401(k) plan. Funds are withheld from each paycheck and deposited into your account. If your employer matches part of your contribution — and many do! — you will accumulate even more. A second way to consistently save is with an automatic savings transfer program with your financial institution. You decide how much and when you want funds transferred from your checking account into a savings account. You can also use a payroll deduction plan from your employer and get the same results.

Saving Smart

Along with how much and how often you save, what you earn on your funds will determine how fast your money grows. You cannot control what happens with interest rates or the stock market, but you can consider different types of savings vehicles that provide different returns.

The simplest savings vehicle to consider is buying certificates of deposit (CDs) instead of leaving funds in a savings account. CDs usually offer higher interest rates, but they are time deposits and have penalties for early withdrawal. If you can accept not having immediate access to your funds, CDs can be an attractive savings vehicle.

Another smart saving idea is to use a regular Individual Retirement Account (IRA). You can establish a regular IRA regardless of your income and regardless of whether you are eligible to participate in your employer's qualified retirement plan. One of the benefits of IRAs is that earnings within the IRA are tax deferred. This has the effect of increasing your earnings. You delay paying taxes until you withdraw the funds. Just keep in mind that there is a penalty if you withdraw the funds before you reach the age of 59 ½.