[ The Money Side of Lifeā„¢ ]

Systematic Savings: Start early and stay rich

By Ramit Sethi on February 1st, 2009 •

Why do personal finance pundits still tell us to stop spending money on lattes? Has that ever worked? Instead of wasting our time focusing on saving $1 or $2 here or there, I prefer to focus on the few big things that really matter and that I can control, the things that will make hundreds of thousands of dollars over the long term. The best part is that it's simple to set up, and you build a system to automate your money management in no more than six weeks.

Week 1: credit cards.

There's an unusual fear of credit cards in America--mostly because people don't know how to use them and end up getting in tons of debt. Look, some credit cards offer huge consumer advantages like automatic extended warranties for anything you buy (like your iPhone) and rewards like free airline miles. I use my credit card to pay for virtually everything I can--and then set up an automatic payment each month.

First, if you have debt, pay it off as quickly as possible. Then don't be afraid to have one or two credit cards and use them, paying them off each month in full. This builds your credit, which will save you tens of thousands of dollars when you buy a car and home.

Week 2: optimize your accounts.

Make sure you have a no-minimum, no-fee, high-interest account, and that you're not paying any fees for your checking account. If you get caught paying a checking fee, switch to a no-fee account. They are available at many financial
institutions, so ask if yours offers one.

Week 3: set up an investment account.

Don't worry about putting money in it yet--just open an investment account. If your employer offers a 401(k), make sure you're participating, especially if they offer a 401(k) match. Also, open up a separate investing account for your Roth IRA.

Week 4: conscious spending.

I have a friend who dines out more than the average person. He works hard, and before spending all that money, he maxes out his investment options and consciously chooses what he values. Compare this to most of us, who look at our bills at the end of the month and shrug, saying, "I guess I spent that much." When you spend consciously, you can afford to pay more for the things you love--but you have to cut costs mercilessly on the things you don't. You love jeans? Sure, buy that new $200 pair. But if you don't care about your TV, stick with your old crappy one rather than replacing it with HD hotness.

Sit down and sketch out the major costs you'll encounter in the next five years. Think about a car, a down payment on a house, a wedding, insurance, or maybe even kids. Then set up savings goals for each in your savings account. For example, according to the American Research Group, Americans spend over $800 on Christmas gifts. If you wait until the last minute, you'll have to come up with $800 cash. But if you start saving in January, you only need to save $67 per month. Apply the same thinking to things like your car, your wedding (even if you're not engaged), and your first down payment.

Week 5: automate.

Nobody wants to manage money manually, so I recommend setting up an automatic system to handle your monthly payments. If you have a 401(k), ask your HR person to automatically take money out of your paycheck to fund it each month. Treat your checking account like your email inbox--everything goes there first. Automatically transfer money to your savings and Roth IRA each month. Set up auto-pay on your credit card and any other consistent bills you have.

Week 6: invest.

Follow the Hierarchy of Investing:

  • First, if your employer matches your 401(k), contribute as much as possible to get the full match. This is free money!
  • Next, pay off any debt you have.
  • Third, contribute as much as possible to your Roth IRA (up to $5,000 this year).
  • If you still have money left over, go back to your 401(k) and contribute as much as you can, up to $16,500 per year.

Most people think "investing" means "picking stocks." Wrong. For most investors, it would be a good idea to consider low-cost index funds, rather than stocks. Index funds require lower fees and maintenance than stocks, and are far more stable. I like lifecycle funds (also called target-date funds), which allow you to pick your age and then handle the rest for you. Don't try to guess where the stock market is going or which stocks will do well--even actively managed funds fail to beat the market at least 68% of the time, according to S&P's. You can probably do better by buying into low-cost funds and automatically investing money (shoot for at least $100/month).

The Bottom Line

According to a 2006 survey by the Consumer Federation of America, 21% of Americans think that the way to get rich is through winning the lottery. There are no secrets or shortcuts, but if you start early, spend consciously, and invest consistently, you should be financially secure.

Sources: americanresearchgroup.com; consumerfed.org; cbsnews.com; fool.com; investopedia.com; standardandpoors.com

College Student

This is great information and all, but how does this differ from ANY OTHER financial advice that is given today? Getting rid of debt is easier said than done, especially when you could rack up $50,000 in student loans. Being conscience of what you spend can be difficult for people who can't control themselves. What are the things that I need to know/things I don't know? I understand that you are trying to appeal to the masses, but I had no idea that the interest on my student loans are tax deductible before I had advice geared towards my specific situation.

The ways to improve this section would be to offer not only answers to our problems, but RESOURCES that expand upon these ideas. I like what you're doing, but there are a ton of unanswered questions out there!

by College Student on February 8, 2010

I would revise the last rule. If you have extra cash at the end of the month, it is much more advisable to max out your IRA first. 401ks typically have higher fees tied to them and have to be rolled over if you have to switch to another employer while the IRA is established in your own name.

by SL on February 8, 2010

College Student,

There are lots of unanswered questions, which is why we have lots of articles available online. This is just one article where we try to address the big picture, keep reading for valuable information on all aspects of personal finance. And if you find that you still have questions, please let us know at brassmagazine.com/feedback. We want to hear them!

by jenniebartlemay on February 9, 2010

SL: that's a wise suggestion. However, the benefit of starting with your 401k is that if your employer matches funds, then you're getting double your money. IRAs are a great investment vehicle, but milking your 401k for as much money as you can is a good idea too.

by jenniebartlemay on February 9, 2010

Contributing up to the percentage the employer will match is a given, no need to turn down free money. However any excess cash after that should be transferred to the IRA before maxing out the 401k due to lower fees.

This difference is blurred if you work for a large corporation with ROTH 401k and Traditional 401K options with accounts held at Vanguard but for most people employed in smaller businesses the portability, flexibility and lower costs of an IRA will win out.

by rayout on February 13, 2010

Rayout: That's the point Ramit makes. IRAs can be lower in fees than 401(k)s, so it's best to contribute to an IRA before moving on to a 401(k). A Roth 401(k) certainly can be confusing if you don't know what you're doing. That's why research is always key. Thanks!


by jenniebartlemay on February 15, 2010

I definitely agree with the sentiment. In Canada we have the RRSP which is very comparable to the 401K. It's really not that complicated to retire rich. It simply requires discipline.

by Kettlebells on May 25, 2011

 Discipline is a good way to put it. Attention is another good thing too, though. Paying attention to the options available, and to how your investments are doing over the months and years. Thanks for the comment!

by jenniebartlemay on May 25, 2011
Property Manager

One thing I didn't see mentioned was the creation of an emergency fund. I'd think that socking away enough money to cover several months worth of expenses would be smart to do - probably right after you've gotten debt paid off.

by Property Manager on May 26, 2011

 An emergency savings is absolutely essential. The rule of thumb is usually 3 to 6 months of expenses. Paying off debt is a priority, but it's also wise to develop even a small emergency savings while focusing on paying down debt. Otherwise, if something happens while you're paying down debt, the only thing you would be able to do is increase your debt again. Thanks for commenting!

by jenniebartlemay on May 26, 2011
Dee the Property Manager

Yeah, that small emergency fund is good too - heck, even $500 or so would pay for new tires or maybe a washing machine or car repair if you needed it. Put SOME aside now, more later. Nice blog!

by Dee the Property Manager on May 26, 2011

 Thanks! Ramit Sethi is a great writer! You can find him over at icanteachyoutoberich.com

by jenniebartlemay on May 27, 2011
Ron Stone

Good advice. My only concern is putting all of someone's 401K into the stock market. I'd see what other options are out there, particularly for the next 5 years or so with all the money printing going on.

by Ron Stone on May 27, 2011

 That's a great point. I think what Ramit was trying to get at is to start investing for the future, even if you can invest in the safer money market accounts, mutual funds or bonds within the 401k. It's especially important if the employer matches contributions. It's free money!

by jenniebartlemay on May 27, 2011

there is no doubt that savings is one of the biggest tool in today's world to survive. I like this article a lot. Thanks 

by Anonymous on June 1, 2011
event management Cape Town

It is absolutely necessary for people to save early to be rich later. You should always keep the future in mind, in my opinion to be honest.

by event management Cape Town on July 3, 2011

 Absolutely. Thanks for commenting!

by jenniebartlemay on July 5, 2011
Asheville dui attorneys

The old saying goes true! "Save for the rainy days.... And do not spend more than you can earn". So simple statement but brings a lot of advantage if we try to follow.

by Asheville dui attorneys on July 19, 2011

It is simple, but sometimes so hard. Life comes at you fast, and these basics are best when started early and held to with vigor. 

by jenniebartlemay on July 19, 2011

Of course there are times these ideas of saving for the future has to be done, but saving is not that easy if dedication and determination was not there.

by Anonymous on August 31, 2011

 It's definitely not easy. Saving is as much about math as it is about psychology. You have to mean it to get it done. 

by jenniebartlemay on August 31, 2011

In this current economy each one of us would be needing such kind of financial advice, well we must learn how to save more for our bills as much as possible avoid buying things that might not be that useful to us.

by Jenny on September 20, 2011

 Absolutely! It's important to determine whether you need something right now, rather than just want it. Also, it's important to determine if you need it right now, or if you can wait until later. Those two questions can save you a lot of money!

by jenniebartlemay on September 20, 2011

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