Saving Savvy

 

or saving for a compact-disc player. The most effective way to do it is by paying yourself first."

"Absolutely correct! So, if Dave, for example, wants that player, he should arrange to have so much a month come directly off his paycheck and go into his account. When he has accumulated enough, he will withdraw the funds and buy the CD player. Tom hit the nail on the head when he said that it doesn't matter whether you're saving for retirement or for a luxury item—pay yourself first! The only difference is how you invest the savings. It doesn't take long to save for a consumer item or a trip. For that reason, you must invest the savings conservatively. Equity mutual funds, real estate, and stocks are not appropriate vehicles for these savings. Their short-term return is too uncertain. The money should be placed in a competitive, guaranteed investment.

"What I mean by 'competitive' is probably best illus-trated by an example. Let's say Cathy is saving up for a car that costs twenty-three thousand dollars. After one year, she's saved ten thousand dollars—not an impossible feat on her enviable income. She's confident that she'll be able to save a thousand a month in the second year. How should she invest the ten thousand she's already accumulated? Well, she knows she's not going to need it for a year, so instead of settling for the low rates that savings accounts pay, she should buy a one-year certificate of deposit. She should purchase the CD from an institution that is covered by the Federal Deposit Insurance Corporation and that offers a good rate. Don't settle for whatever rate your own bank is offering—shop the market. What I'm really saying is that investing this type of savings should be governed by one thing: common sense."