I’ll never forget my first foray into savings. As I neared my 16th birthday, learner’s permit in hand, my 15-year-old self vowed that she would buy a car.
At the time, I worked at a burger and custard joint in my Wisconsin hometown. With no real forethought, I tacked an envelope to a bulletin board in my bedroom, and pinky-swore-and-hoped-to-die that I would save half of every paycheck.
My 16th birthday came and went. The party my friends threw was a great surprise, but there was a much less pleasant gift waiting for me in that envelope. I had saved approximately $70 — and even though I was earning minimum wage, I knew I had earned much, much more than that over the previous months.
In college, I transitioned from the envelope method to electronic banking. Although the tools had changed, my haphazard savings habits had not. My “plan” consisted of transferring $50 out of my checking account and into my savings account whenever the mood struck me … which wasn’t very often.
Upon entering the real world, I began meeting colleagues who discussed things like 529s, 401(k)s and a variety of other mysterious numerical codes. My benefits paperwork from HR came, and it may as well have been jibberish.
Being a notorious worrywart, I decided it was high time to worry about the state of my savings. I wasn’t sure where to start, so I used a few online calculators to help plan for a retirement savings goal.
After punching in some numbers, the computer calmly informed me that in order to keep pace with inflation and live comfortably through my (hopefully) long retirement, I should plan on having more than $2 million in savings and investments.
Two. Million. Dollars. As someone with a net worth of approximately $200, that was a terrifying figure. But instead of going to my bulletin board and tacking up a new envelope, I decided it was time to take a few real steps toward building my savings. This year, I’ve focused on three habits that have made the concept of saving much less scary:
1. Saving something every month:
After about two months, I realized that I could live without the extra $200 each month, and I decided to increase my deposits to $150 every other week. The extra $50 seemed small, but during the course of a year it adds up to an extra $1,200. Since the automatic transfers occur without me even have to think about it, funds that may have gone to my local watering hole or a new pair of shoes instead go to what I now refer to as my “peace-of-mind” fund.
2. Investing in my employer’s 401(k):
In that stack of HR paperwork referenced earlier, I discovered that my employer not only has a 401(k) program, but that they also offer a 1 percent match. While 1 percent certainly isn’t much, not investing meant I was essentially leaving free money on the table. Plus, it was another way to automate my savings in a pain-free way, since the deposits come directly out of my paycheck.
3. Opening a Roth IRA:
Math was never my strong suit, but I knew that keeping the majority of my savings in a bank account earning 0.5 percent interest wasn’t the best return on my investment. So I began doing some research on other options.
Ultimately, I decided to open a Roth IRA, which allows you to invest up to $5,000 after-tax dollars in 2012 (there are some income limits, of course). When I retire, the withdrawals will be tax free, and since I’m hoping I’ll be in a higher tax bracket when I reach that age, investing in a Roth IRA while I’m young made sense.
I had already learned about the importance of automating my deposits from steps one and two, so I looked at my budget and recent spending history to determine how much I could comfortably invest each month. Investing in my Roth is now a non-negotiable line item on my budget, and by choosing a discount broker such as Vanguard, I don’t get hit with extra fees.
I’m no Wall Street investor, but I have to admit I enjoy watching my balance grow, no matter how tiny it is. It’s a concrete way to feel more in control of my finances, both present and future.