Saving Money

Unless you’ve been incredibly lucky, there’s probably been a moment in your life when you’ve sorely wished that your life savings consisted of more than the cash in your wallet and the positive balance in your bank account. Whether it hit while you were stuck by the side of the road waiting for a tow truck to take your transmission-less car to a shady repair shop or standing knee-deep in the muck of your uninsured home’s living room after a flood, this epiphany may have been enough to get you thinking seriously about saving money for the future.

Then again, it may not have been. Millions of Americans, either because they can’t find a decent-paying job or because they make poor choices with the money that they do have, lack an adequate stock of emergency cash. A recent article in Forbes Magazine (Forbes.com) makes the staggering assertion, backed by U.S. Census data, that at least 25 percent of all American households have a net worth of less than zero. In other words, the total value of their debt is greater than the total value of their assets.

Saving money isn’t just about preparing for some unknown emergency. Done right, saving can help you to realize long-term goals that will remain out of reach as long as you live paycheck to paycheck. Maintaining and growing a fiscal surplus over the long haul can help to fund your lifestyle after you stop working for good, but it can also make you more attractive to the lenders to whom you’ll need to talk if you need funding to open a business.

It’s one thing to know why you should be saving, but how should you actually go about doing it? If you’re struggling with serious credit card debt, barely make enough each month to cover your household’s expenses, or both, saving money is probably far from your mind.

Don’t throw in the towel before you even start to fight. It’s possible to save money while simultaneously paying down debt and putting food on your table, although, like most difficult tasks, it requires some discipline.

First, assess your debt situation and determine how bad it actually is. If your total outstanding balance across all of your existing obligations is more than a few thousand dollars, you’ll need to change your spending habits.

Stop using your credit cards except for a single low-interest emergency card that you don’t take out of your wallet until you’ve exhausted all of your other options, then start paying down your other cards and loans. Prioritize credit products with the highest rates of interest since they’re the most expensive and stand to cost you more if they remain unpaid over time.

If you don’t seem to be making much headway, you’re not out of options. Talk to a low-cost debt settlement agency about negotiating with your creditors to slash your total debt burden to a fraction of its current size. While every case is different, debt settlement agencies compare favorably to more expensive debt consolidation lawyers and less-effective credit counseling agencies.

Once your debts are under control, set up a high-yield savings or money market account and begin making regular deposits into it. You may need to start small, adding whatever small amounts you can afford to spare as you work to trim other areas of your household’s budget.

That’s fine: Eventually, you’ll build up to the point where you can set aside five or even 10 percent of your monthly take-home pay as savings and barely feel it. Remember, every frivolous purchase that you defer frees up more of your hard-earned cash to sock away for a more comfortable future.

You shouldn’t confuse your “rainy day” savings fund with your employer-supported or independent tax-deferred retirement plan. Whether it’s a 401(k), Roth IRA or some other novel investment vehicle, your retirement fund generally can’t be touched until you reach a certain age without incurring penalties that will wipe out some of its value.

While you may have many more productive years left in you, it’s never too early to start thinking about your retirement. Thanks to the gift of compound interest, individuals who begin contributing to a retirement account at an early age will retire with far more money in the bank than folks who wait until relatively late in life.

According to FoxBusiness.com (http://www.foxbusiness.com/personal-finance/2011/12/16/retirement-planning-in-your-20s-must-do/), you must save 11 percent of each paycheck beginning at age 25 if you wish to retire at age 65 with a comfortable annual income. That sounds steep, but it’s doable. The costs of waiting even a few years are steep: If you put off saving for retirement until age 35, you’ll need to save nearly one-fifth of your total take-home pay to retire by the time you’re 65.

Some employers match their employees’ retirement-account contributions. If yours does, you’re in luck. If not, don’t be too disappointed. You’ll still feel less of a sting from these savings outlays because they’re made with before-tax income, which stretches them further.

You’ll need to have at least one savings account aside from your retirement fund, but you may soon outgrow it. These days, the interest that you earn from even the most generous savings accounts amounts to virtually nil after inflation, and net payouts from stingier big-bank savings accounts may well be negative.

Once your savings have reached a certain size, then, you’ll want maximize the earning power of your savings by diversifying away from a simple interest-bearing deposit account. You’ll need to maintain a solid cushion, perhaps 10 percent of your total annual income, in a liquid savings vehicle to cover the costs of unforeseen emergencies.

Anything beyond that belongs in a CD, which is a higher-yield account with a fixed term. Most CD maturities are brief, ranging from 10 months to two years, although some banks offer long-term products with maturities of 10 years or longer. Once each of your CDs reaches its maturity date, you’ll be given the option either to withdraw your funds with interest or “roll over” the entire product into a new CD with a similar rate and term. Compounding ensures that you’ll earn more money over time if you roll over your CDs.

Ultimately, no one can tell you how to save or what you should do with the money you’ve accumulated. Your long-term savings goals are yours alone, but they can include such costly endeavors as purchasing a house, starting a business, and supplementing your existing retirement account so that you can leave the workforce a few years early.

Saving money offers one surefire guarantee: Your financial cushion will lower your day-to-day stress levels and reduce the likelihood that you’ll be forced to do something desperate in an emergency. If you can’t pay for an unforeseen health scare or vehicular breakdown out-of-pocket or with a low-balance credit card, you’re left with a host of bad options like taking out a ruinous payday loan or loading up a high-interest credit card that you know you can’t afford.

As hard as it may be to call up the discipline necessary to save money for the future, it’s even more difficult to dig yourself out of a high-interest debt spiral.