Saving's not as hard as spendthrifts fear

Experts say first step in establishing emergency fund can be toughest, but success comes in making it a habit

Your Money

December 18, 2005|By KNIGHT RIDDER/TRIBUNE

Save your money.

Your parents and grandparents taught you the concept when you were a child. Remember the Christmas club savings accounts?

"Save Your Money" also is the slogan that anchors the marketing campaign of ING DIRECT, an Internet bank that promotes no-hassle savings accounts and aims to bring consumers back to the old-fashioned concept of saving.

It's not a hard thing to understand. So why aren't more consumers doing it?

No doubt, some consumers live hand to mouth financially. Every penny goes to pay for living expenses, and there's nothing left to stash away.

But many others don't think enough about saving and aren't willing to slash unnecessary expenditures that could translate into a fatter savings account.

The national savings rate has been negative for four months.

`An impatient society'

"Spending means gratification now; savings means gratification later," said Bryan Clintsman, a certified financial planner at Clintsman Financial Planning in Southlake, Texas.

"It really is as simple as the fact that we have become an impatient society that wants our meals cooked in a microwave, our money dispensed from an ATM machine and our messages sent by BlackBerry because e-mail is too slow."

Then again, if you have no idea of how much you'll need for your future, it's easier not to worry about it.

"More people would save for their financial goals if they simply knew how much was required," Clintsman said. "Since we don't often know the exact number that needs to be saved each month, we often claim blissful ignorance and don't save anything."

What most people don't realize is that they have more control than they think over their ability to save.

One of the main reasons that more consumers don't save is because they think they can't.

`Against the grain'

"I'm saying yes, you can, but I'm going against the grain," said Cynthia Nevels-Nelson, executive director of the Jr. Finance Literacy Academy Inc., a Dallas program aimed at young people.

Too many people live in debt and worry about it later, she said.

"They say, `I don't make enough to save.' It's this thing of `I can't' versus believing that there is a way of finding it," Nevels-Nelson said.

For those who have been in the habit of spending, the roughest part may be that initial push-off.

"Very often, the hardest dollar to save is that first dollar," Sen. Charles E. Grassley, an Iowa Republican, said in a statement referring to congressional efforts on pension-funding reform. "Once people begin to save, it can become a habit that lasts a lifetime."

One of the best ways to save that first dollar is not to see it in the first place so you don't miss it. Consider having your bank automatically take out a fixed amount of money each month from your checking account to be stashed in a savings account.

"This will minimize the likelihood you forget to move the money yourself," Clintsman said.

Earmark your first savings dollars toward an emergency fund. This type of account acts as your own "lender" in case you have a big bill one month, such as a car repair or medical expense, and it will keep you from putting anything on a credit card.

Ideally, you should have an emergency fund equivalent to four to six months' spending.

"Don't worry about trying to make a killing on this investment account," Clintsman said. "Emergency funds are designed to be safe, not sexy."

Some is better than none

Don't be discouraged if you can save only a small amount of money. Saving something is better than saving nothing.

"Even $50 or $100 per month is a great start, and almost everyone can do this," Clintsman said.

If you let it, the power of compound interest will turn your small monthly savings into a large stash of cash over time.

Compound interest is the interest you earn on interest. For example, if you deposited $100 in a bank account at a 10 percent annual yield, you would earn $10 in interest the first year and $11 in the second year, for a balance of $121.

That extra $1, which you earned on the $10 interest from the first year, is the compound interest. Left alone, that initial $100 would grow to $1,744.94 after 30 years.

"It's not about denial today," said Jim Kelly, executive vice president of ING DIRECT.

"You don't have to save a lot of money today to have a lot of money in the future," Kelly said.

But in order to achieve that, you will have to change your behavior.

"If necessary, set a personal goal for yourself to give up one small thing to help contribute toward this goal," Clintsman said.

Nevels-Nelson was reminded of the meaning of sacrifice when she was hit with a summer electric bill of nearly $500.

Nevels-Nelson, a single mother, enlisted the help of her sons, Jeremy and Tyler, to chop down that bill.

"We turned the air conditioning off and opened the windows," she said. "I unplugged things we weren't using like stereos and the VCR that's blinking 12:00."

On capital gains and losses

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