That’s a direct quote from my new book Money Rules. Why is saving specifically for something so crucial? Because humans are way too focused on the short term to the detriment of the long.
By definition, saving — for anything – requires us to not get things now so that we can get bigger ones later. That’s hard. Our brains are hard wired to prefer the here and now. But it can be done, and it’s much, much easier when you know specifically what those down-the-road items happen to be. In fact, it’s easier yet, when you can see them.
Find a picture (if you’re saving for a house or something you haven’t specifically found yet, find one that you like and it’ll do) and pin it up on your friend or make it your screen saver. All that strategy, though, begs the question – what should you be saving for? Three things (or rather, three types of things):
Fulfill the hierarchy.
There are a two things that you need to save for. First, you need an emergency cushion of no fewer than six months of living expenses. This needs to be cash in a liquid account where you can get at it in – yes – an emergency if you need it. In other words, money markets, not cds.
You also need to save for your future, that means retirement. Whether you do it by having money swiped out of your pay, pre-tax and deposited in a 401(k) or whether you make an IRA contribution yourself, you need to save for retirement. And the earlier you start the better.
Ask any 40 or 50-year old who didn’t start saving until they were deep into their 30s. They’ll tell you the same thing.
Maximize your tax-advantaged options for retirement, college.
Your retirement comes before your children’s tuition. That’s because there’s no financial aid for retirement and there’s still a good deal available for college. But if you’re a parent, I know you’re going to want to save for both. Make sure you do it in a tax-advantaged account – IRA, 401(k), 403(b), SEP, Keogh, Roth, the list goes on – so that your money can grow faster because you don’t have to pay taxes year after year.
You can visualize these goals too, by the way.
Putting junior in a sweatshirt from your alma mater is one way to do it. Knowing what your retirement will look like – a ski-in-ski-out condo on the slopes in Stowe? – is helpful as well.
Have some fun.
If you’re fulfilling those need-based goals and you can still save more, great. Ask yourself (and your spouse if you have one) what you want. A vacation? A designer dog? It’s up to you.
This, as we say in my house, is why we work. Not just so that we can get what we need, but so that we can get what makes our hearts flutter a bit. Mint.com has some great tools to help you reach your goals. But it’s always easier if you step-by-step your way there.
Take the price of your item. Divide it by the amount of weeks (or months) you are giving yourself to achieve your goal. And that’s the amount you have to put away each week (or month). If the number seems too optimistic, adjust a bit. And you’re on your way….