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Getting A Bargain On Your Savings

Contributor:
Paul Ambrose
Paul Ambrose

Although some people have the self-discipline it takes to effectively save money, most of us struggle with saving.  Perhaps we just put away what’s left at the end of the month; perhaps we don’t save at all.  Here are a few reasons why saving first—rather than last—is a better choice.

“Dollar Cost Averaging…”

You can automatically get lots of bargains by making regular investments in things like stocks, which fluctuate in value.  For example, when you invest $100 in Stock A in January, it might buy you 10 shares at $10 each.  In June, the price goes up to $20, and you can only buy 5 shares.  Then by December, the price drops to $5 per share, so now you can buy 20 shares. 

The average cost over the year was $14.58.  You invested a total of $1,200, so you should have around 82 shares.  Instead you have 100 shares, because you automatically bought at regular intervals throughout the year!  You “saved” 18% on your savings, and you didn’t do anything special at all!  

“Pay yourself first…”

Save first, rather than last.  Decide in advance how much you can handle saving each month—say, 5% of your paycheck—and then put that aside first thing, before you begin paying bills and spending money traveling to Aunt June’s house.  The wisdom of this is fairly obvious:  when you save what’s there at the beginning of your paycheck rather than the end, there’s more of it to save.  The execution is a little more difficult.

“Compound interest…”

Those silly finance guys, you’d think they have nothing better to do all day than think up complicated terms for everything.  And the truth is, mostly, they don’t.  Being an accurate financial forecaster is more or less the same as fortune-telling:  pretty unreliable. 

What isn’t unreliable is this:  when you invest in something, if you leave it alone for a long time and reinvest all the dividends back into the same investment, at the end you have a surprisingly large amount of money. 

Now, if you not only reinvest the dividends but also add more and more money to the same investment each month or on a regular basis, you increase the power of multiplication, and the size of your eventual return on investment. 

A simple example is an investment of $100 monthly:  at the end of 10 years at 5%, you have $15,000—but you’ve only paid out $12,000.  At the end of 20 years, with the same interest rate, $41,000; 30 years gets you $82,000; and 40 years $148,000—and this time you only paid out $48,000!  

A good time to look at increasing your savings is when you have any of the following:

•    an unexpected pay raise
•    a tax rebate
•    an elimination or reduction in one of your expenses
•    a financial windfall such as an inheritance

The best time to start saving, though, is right now!

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