Happy New Year! Along with Dick Clark, Times Square and In-and-Out lists, New Year's resolutions are very popular every January. You may have already made - and broken - some of your resolutions for 2010. Among the most common types of resolutions people make are to improve their physical and fiscal health. Today's column focuses on why you should resolve to save smarter and more in 2010 and some tips on how to do so.
Why you should make a New Year's savings resolution for 2010 \nMaking saving a habit is an important part of being fiscally healthy. Savings serve two primary purposes: They help you reach your financial goals, and the money you save provides a cushion for emergencies. (More about both of these concepts in a moment, but first you may be wondering why to bother making a resolution.)
It is common wisdom that people who state or write down their goals are more likely to achieve them. I was not surprised to read in The Wall Street Journal that the same goes for New Year's resolutions. The Journal cited a study by John Norcross, a psychology professor at the University of Scranton, which found that people who make New Year's resolutions are 10 times more likely than people who don't make resolutions to achieve their desired changes. Kudos to those who have already resolved to save in 2010; if you have not already made such a declaration, today is a great day to do so. It is never too late to start the journey towards fiscal health.
Financial goal-setting: the reason to save \nSaving matters not for its own sake, but for what it enables. The purpose of saving is not to have a big pile of money - like Scrooge McDuck - but to have the resources to do what you want to do. One of the most important financial steps you can take is to think about and set your own financial goals. You should set both short-term and long-term goals. Some goals will be common to nearly everyone - e.g. retirement as a long-term goal - while others will be more unique. Your goal may be to take a Spring Break cruise, but your roommate may want to buy an iPhone or donate $500 to a Haiti relief fund. The important thing is that you set financial goals that resonate for you. You will also find it helpful to make your goal measurable and time-bound. It is good to say your goal is a Spring Break cruise, but it is even better to specify that your goal is to reach $600 for a five-day Caribbean cruise by fourth year. Spending and saving is all about making choices. The more meaningful your goal is to you, the easier it will be to choose to save for it.
After you've established some goals and a time frame for achieving them, you can work backwards to determine how much you'll need to save to reach them. Continuing on the cruise example, if you are a third-year student now, then saving $10 a week (for 60 weeks) would be sufficient, but a current fourth-year student starting from scratch would have to save about $100 a week! This illustrates the importance of determining your goals and starting to save for them far in advance.
Pay yourself first \nOne of the best strategies people find helpful for saving is to "pay yourself first." This means you should set aside your savings as soon as you receive your paycheck or income, before going out and spending money on other things. Setting aside money for saving is easiest when your pockets are still full. Direct deposit from your paycheck can be used to automate your savings; this can be one of the most foolproof ways to save.
Set up separate accounts for each goal\nMany people also find it helpful to set up a separate bank account for each of their savings goals. You will probably be saving for multiple goals at any one time, and having a separate account for each goal allows you to easily track your progress. Another reason why people have specially-designated retirement accounts or "Christmas Gift" accounts is that when the money in an account is earmarked for a particular purpose, you will be less likely to spend it on something unplanned and then later regret it.
Your emergency savings account - there for you in a pinch! \nApart from saving for particular goals, it also is very important to have an emergency savings account. An emergency savings account is pretty much what it sounds like: a special savings account that you only use for emergencies and unexpected expenses. You should not use money from your emergency savings account to pay for regular or optional expenses. This account is to provide a financial cushion when you unexpectedly lose income - like getting laid off from your job - or face urgent, unplanned expenses (e.g. your car breaks down, the air conditioning dies during the summer). If you lacked an emergency savings account and suddenly faced an expense of this type, you could be forced to borrow money from mom, dad or even worse, a credit card with high interest rates! Although borrowing from your parents or your MasterCard is better than going hungry or not repairing the car you need to drive to work, having an emergency savings account can help you avoid debt altogether.
How much should you have in your emergency savings account? A good rule of thumb is enough to cover three to six months of your expenses. This would suffice if you end up unemployed for a few months. Full-time students may be able to get by with only three months, but if and when you are working, then having six months worth of expenses in your emergency savings account is safest.\nWhere and how should you keep your emergency savings account? The most important thing is to keep it as a separate account. Do not mix it with your general checking account. The money should be kept at a bank or credit union in an account that is liquid (not a CD) and insured (e.g. by the FDIC). You can find accounts that pay interest, although these days you will probably not find much more than 1 percent. Generally money market deposit accounts work well and pay decent interest.
What if you don't have an emergency savings account? It's time to start one. Figure out how much money it should have - three to six months expenses - and set a short-term financial goal to save that much.
A new year is a great time to revisit your financial goals - or think about them for the first time. After adjusting or setting your goals, resolve that 2010 will be a year in which you progress towards meeting them. Good luck and happy saving!
Note: I strive to offer sincere, good faith advice in this column, although we do not legally enter into a fiduciary relationship when you read it.
Benjamin is founder and principal of Grosz Financial Planning, LLC and is a candidate for CFP Board's certification. His column runs biweekly Thursdays. He can be reached at b.grosz@cavalierdaily.com.
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