Get into the habit of saving

Last week we looked at how to break bad money habits. This article will focus on how to get you into the habit of saving How much do you spend every week on unnecessary purchases? How much do you spend eating away from home/ how often do you pick up impulse items on your way to a necessary purchase? Do you own a new car, but still rent an apartment? Is your house payment reasonable compared to your personal income? By answering these questions honestly, you will see your spending style. When it comes to affluence, looks can be deceiving. People who drive nice cars, live in beautiful homes and belong to the right clubs may have very little disposable income. They live from month to month, trying desperately to survive and keep up with the expenses they have incurred. Others who live in modest homes, drive used cars and go to football with their kids wind up being the millionaires next door.

Your Savings

So, you’ve set your financial goals; you’re maximising your contribution to society through industrious effort; you spend only on the necessities because your self-esteem enables you not to have to keep up with the neighbours. Now you need to figure out what to do with all the extra cash. Congratulations! You’re on your way to financial freedom through a sound and lasting set of family financial habits. There are a number of different savings and investment accounts that you’ll need to be familiar with. We’ll go into detail about each.

Below is a list of the various savings and investment accounts you’ll consider throughout your lifetime:

*The emergency fund, one-six months of income just in case.
*Your retirement, the first place to save, because it can be  tax-deferred.
*University savings for your children, let them help out on this one.
*Your investment account
Each account has a different purpose and each will be an important part of your overall financial plan.

Emergency fund

By simply establishing your emergency fund, you’ll be doing better than most of your neighbours. It’s a small commitment, but it will give you peace of mind worth ten times the account value. This account should be enough to cover your monthly budget for one to six months, depending on your savings ability. Once this fund is established, you’ll have a level of safety that will enable you to consider alternative, less liquid investments. Your first savings commitment after your emergency fund should be with a tax-deferred retirement plan. If you’re saving money through a time deposit, a money market account, or simple passbook savings, the government may tax your interest income. The same goes for fixed income securities such as bonds or mutual funds with a high dividend. The only way to avoid these tax consequences is to do your saving, investing and trading in a qualified vehicle  such as an annuity. The long-term results of compounded, tax-deferred savings are significant. Consider an initial investment of $10,000 with an annual return of 11% (the average return of the market since 1926) over a period of 30 years.

Check the broker

Once you’ve maximised your annual contribution to those retirement vehicles, if you still have money left over (congrats), you’ll want to check out some investment opportunities with a local broker. You’re probably not going to be a huge player in the market right away, so it’s prudent to choose a good-quality, growth mutual fund. With a mutual fund you can invest small amounts of money and still benefit from diversification and professional management. A number of great resources are available to help you make decisions regarding what fund to choose. One of the biggest mistakes investors make is selecting last year’s high-performance fund as this year’s big winner. Every fund manager will have a great year and every great fund manager will have a doggy year. Because of the effects of market fluctuation and managers’ needs for self-preservation, one kind of year usually follows the other.

Selecting a Fund

In selecting a fund, make sure you look at the five-and if available, the ten-year performance numbers as well as the manager’s tenure. If you can get to a point where you have set some specific financial objectives and have at least established an emergency fund, you’re ahead of 95% of the rest of the population. The steps outlined so far are very broad and should provide you with some basic ideas. Implementing every aspect of a savings and investment plan could take some time. Give yourself some slack and don’t expect to accomplish everything overnight. Life is a marathon, not a sprint. Start out slow, plan your pace, stick to it and be there for the finish line.

Exercise
*Set aside an hour to discuss your family’s financial goals.
*Review your income and spending habits and establish plans for a family emergency fund.
*Then take a minute to review your retirement funds and make sure you’re maximising your contributions and investment selections.
*Make sure your family’s financial objectives are specific and write them down.
*Decide what you need to do first and jot down the first step in your personal financial plan process. (This probably will be your emergency fund.)
*Determine an initial family financial objective and commit to attaining that goal.