When Warren Buffet spoke to students at Georgetown’s McDonough School of business back in 2013, he said that good habits might be more important than being smart. He then went on to stress the importance of establishing the habit of saving.
Buffet has also been quoted as saying: “Don’t save what is left after spending; spend what is left after saving.” The easiest way to save is to put your saving regimen on “automatic pilot” where a portion of your paycheck is systematically deposited in your savings account. You don’t have to think about whether or not to save every time you’re paid because you have already made the decision and set the process in motion.
The first goal of saving should be the establishment of an emergency fund, typically, enough to cover three to six months of living expenses. A person who has an adequate emergency fund can act as his or her own bank when the washing machine goes on the fritz and will not be tempted to succumb to the siren call of the credit card. A competitive internet bank money market account is a great place for an emergency fund because it offers a higher rate of return than a local bank savings account, and it has no equity risk.
After you have established an emergency fund, you can save for known future expenses like replacing your vehicle. Since your time frame is longer, you might consider taking a moderate amount of market risk and save in a conservative mutual fund. Again, automatic, periodic purchases into the fund will keep your saving goal on track.
Finally, you can save for long-range goals like retirement. If you are fortunate enough to work for a company that matches your retirement plan contributions, be sure to contribute via payroll deduction at least the amount that your company matches. It’s free money.
If you value saving and make it a life-long habit, you will reap rewards throughout your life. “The habit of saving is itself an education; it fosters every virtue, teaches self-denial, cultivates the sense of order, trains to forethought, and so broadens the mind. – T. T. Munger