Financial discipline makes your money grow
Make 2012 the year to get money right.
For those who have been procrastinating or worrying, and maybe both, the key is to get started. You may think you are an oddity by letting good intentions go unfulfilled and hoping for the best. But you aren't. Dartmouth College studies show that most of us blunder through our finances — not because we don't have enough money, but because we wait and hope, rather than taking the modest steps that will ultimately free us from worry, regret and losses.
Here's how to move forward, but a word of caution: If you feel overwhelmed by these steps, do not allow yourself to be paralyzed. Rather, start small. The entire package laid out here will make your financial life better in the long run and give you a sense of control. But starting with just one or two items will give you progress.
If you do nothing else, saving a little more than you now do for emergencies and retirement is a start. Paying a little more each month than the minimum on your credit cards will help a lot if you don't add new charges. So here are the steps to make it work:
ADJUST YOUR APPROACH: Often people who struggle with money feel like they get nowhere because they don't have enough money. That might be the case if they've been out of a job. But often it's simply the bumbling along that's the problem. They try to pay the bills when they arrive, and they spend when they think they should make a purchase. Then, money never seems to stretch far enough even if they think they are being frugal. That's true for the affluent as well as those with small paychecks.
So start fresh. Try the budgeting approach outlined in Liz Weston's excellent book, "The 10 Commandments of Money," and use the easy calculator at http:www.tinyurl.com/cp54pyw to move beyond good intentions.
This approach requires that you spend just 50 percent of your pay after taxes on essentials, or "must haves" such as housing, food, utilities, insurance, child care, tuition, telephone, transportation and minimum loan payments. Then, devote 30 percent to items you "want": vacations, gifts, eating out. And 20 percent goes immediately — not as an afterthought — to saving for emergencies and retirement, plus paying down more than the minimum on debts.
So if you earn $3,000 a month after taxes, you have $1,500 a month for necessities, $900 for wants and $600 to save.
DON'T FOOL YOURSELF: If you cheat on the amounts, you will be cruel to yourself in the long run — perhaps setting up a cycle in which you always feel like you are sinking deeper in debt. If you have no emergency savings and the car needs tires, you will whip out the credit card and then struggle with higher charges than those that might be sickening you already.
And if you think you will save later for retirement, consider what people actually do: "Later" tends to never arrive, and near retirement, people panic. Living on Social Security checks averaging less than $1,200 a month isn't pleasant, and people in their 70s can't easily find jobs. Do the "ballpark estimate" at choosetosave.org to see what you will need for retirement and how to get there.
To provide $25,000 a year for retirement living expenses, you will need about $500,000 in total savings in a 401(k), individual retirement account or both. A 25-year-old should be able to get there by saving $25 every week and investing it in a "balanced fund" such as the Vanguard Balanced Index Fund or T. Rowe Price Balanced Fund. But if you can live on $25,000 today, an equivalent 40 years from now will be about $81,000 because of inflation, so keep using part of every pay raise to save more. See the effect of inflation atwww.tinyurl.com/chsdlpk.
NOTHING LEFT TO SAVE? If you find that you are spending more than 50 percent on necessities now and can't save for your future, start looking for cuts. You need a home, but maybe not the one you intend to buy. If you are renting, maybe you can bring in a roommate. If you are locked into a mortgage, you could consider renting out a room. Or if you see no way to cut back on housing costs, where can you cut? You need transportation, but not the car of your dreams.
Do you have Internet at home, at work and on your phone? Cutting here might give you $100 a month, and a 35-year-old who invested it in a balanced fund every month might have about $200,000 for retirement. Natalie McNeal, author of "The Frugalista Files," writes about how she paid off about $20,000 in credit card debt over a couple of years by being deliberate — strategies such as turning lights off before going to bed, skipping pedicures and cooking rather than eating out. Ask yourself the question financial planner Sue Stevens asks herself once a year: "What am I buying that does not give me pleasure?" She stops the unnecessary spending and invests it immediately.
MAKE YOUR PLAN HAPPEN: Going through this analysis will do you no good if the money doesn't end up in your savings account, your 401(k) retirement savings plan at work or an IRA.
To keep yourself from spending the savings, set up automatic deposits that take money from your pay and route it directly to your bank, 401(k) at work, or a mutual fund company or broker in the case of an IRA. You won't spend what you don't touch on payday.
DON'T JUST SAVE — INVEST: Once you've gone through the effort of saving, make sure every penny counts. Keep emergency money in a bank account. But to make retirement savings grow, choose a combination of mutual funds that expose your money to stocks and bonds in a 401(k) or IRA. A balanced fund puts roughly 60 percent of your money in stocks and 40 percent in bonds. You will lose money temporarily in a bad period such as 2008, but historically money in such a fund has grown about 8 percent annually. If you are in your mid-30s and have $10,000 in retirement savings in a bank savings account, you will be lucky if it's $11,000 by retirement. In a balanced fund, that same $10,000 would likely grow to six figures. Try www.tinyurl.com/c3j4shl.