Develop the Habit of Saving

The first step in investing is saving. In 1984, Americans saved an average of 10.8% of their income. In 2011, it is now at 3.6 percent of personal disposable income, its lowest level since the month the recession began. Paul Ashworth, chief United States economist at Capital Economics, explains in the NY Times article Americans Saving Rate Drops Again Puzzling Experts, “With interest rates so low, people who have money are earning lower returns, while people who owe money can service their debts for less. In effect, this has resulted in a transfer of wealth from people who are more likely to save — say, someone nearing retirement age — to someone more likely to spend — say, a young couple with a mortgage and a car loan.”

Ways to Save

Although it may be easy to reason that one doesn’t have enough income to justify saving, it is a valuable habit to establish. It may seem counter-cultural practice but with uncertain economic times, one must consider not spending today so that one will have something to spend in the future. Even with the saving rate dropping, twice as many Americans are saving more money today than they did before the recession, according to a survey conducted by America’s Research Group for An easy way to put this habit of saving into practice is establishing an automatic savings withdrawal from every paycheck. It is also advisable to keep 3-12 month’s living expenses saved in a money-market account in case of a layoff or career change.

The “Magic” of Compound Interest

Compound interest arises when interest is added to the principal so that from that moment on the interest that has been added also earns interest. The earlier one starts saving in life, the more money is accumulated. The rate of return on the investment affects the growth of money. However, higher returns do often carry higher risks. But even a 2% increase can have a substantial effect on the amount accumulated. Begin the habit of saving-even if it is only a few dollars a month.

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According to Americans Research Group, currently many Americans in their 20s and 30s are now saving for retirement because they believe social security will be gone. The rest of the savers say they are saving for the following: college (15.8%), a major purchase (9.1%), vacation (7.9%), back-to-school shopping (7.1%) or Christmas gifts (6.7%). Americans might not be saving for the long-term. But our spending habits are changing. We are becoming more leery of carrying credit card debt. Saving for short-term purchases is a start to creating sound financial habits.