Systematic saving is the process of saving a portion of your income on a regular basis. It is important because establishing or increasing an emergency fund should be your first savings priority in a financial plan. Unfortunately, most people do not save on a regular basis. I have found a key to long-term success is to save automatically by setting up systematic, regular savings. This helps you develop excellent habits.
With an automatic savings plan, you formally arrange with an employer or financial institution to periodically set aside a specified amount of money from your income or an existing account. A planned approach differs from this in that savings are not set aside automatically, but require that you deliberately set the specified amount aside every period.
Automatic plans are preferable because the transactions are made by others, thereby avoiding the temptation to divert funds (out of sight, out of mind). Yet, planning for periodic savings, which is often part of a budgeting process, is an excellent alternative, especially if the routine savings amount is viewed as a mandatory bill payment. Think about this for a moment. Given the choice, would you want to be . . .
a. Fully dependent on others (government, friends, and family) and living in poverty?
b. Partially dependent (some income, but still relying heavily on others), one major crisis away from poverty?
c. Not dependent, but living paycheck to paycheck?
d. Partially financially free (can survive on your income, but there’s not a lot extra to help others)?
e. Completely financially free (can take care of your major financial needs and also lend a major hand to others)?
Here are the likely outcomes based on your saving habits:
* If you save $0 annually and spend more than you make, you will most likely end up like A.
* If you save less than 5 percent of your income annually and never set up a plan, you will most likely end up like B.
* If you save 5 to 10 percent of your income annually, you will most likely end up like C.
* If you save 10 to 20 percent of your income annually, you will most likely end up like D.
* If you save greater than 20 percent of your income annually, you will most likely end up like E.
Invest regularly using dollar cost averaging. You may not realize it, but if you’re investing a regular amount in a 401(k) or another employer-sponsored retirement plan via payroll deduction, you’re already using dollar cost averaging. In fact, you can use dollar cost averaging to invest for any long-term goal. It’s easy to get started, too. Many mutual funds, 529 plans, and other investment accounts allow you to begin investing with a minimal amount ($50), as long as you have future contributions deducted regularly from your paycheck or bank account.
If you’re interested in dollar cost averaging, here are a few tips to help you put this strategy to work for you:
1. Get started as soon as possible. Once you’ve decided that dollar cost averaging is right for you, start investing right away. The longer you have to ride out the ups and downs of the market, the more opportunity you have to build a sizable investment account over time.
2. Stick with it. Dollar cost averaging is a long-term investment strategy. Make sure that you have the financial resources and the discipline to invest continuously through all types of markets, regardless of price fluctuations.
3. Take advantage of automatic deductions. Having your investment contributions deducted from your paycheck or bank account is an easy and convenient way to invest, and can help you get in the habit of investing regularly.
The bottom line is you want to have your savings on autopilot. There’s a saying: “out of sight, out of mind. Any steps you can take today to start saving in a fashion that is simple and easy to set up may allow you to make huge progress toward your goals in the future.