Five Tips for Improving Your Savings

Aesop first wrote about the ant and the grasshopper back in the sixth century B.C. The basic principle hasn't changed in the intervening years: "It is best to prepare for the days of necessity." We're all familiar enough with the more contemporary adage of saving for a rainy day. Yet, the American economy is predicated on consumer spending; it accounts for as much as 70% of the Gross Domestic Product. We've been conditioned to consume, to spend.

As a result, Americans have been spending more than they actually earned for a few years now. The nation's personal savings rate has been in negative territory, until recently, for the first time since the Great Depression. The good news is that the figure doesn't include asset growth (such as capital gains, or a rising house value). The bad news is that housing gains have been making up the difference, so to speak--until recently. Net worth, while looking good on paper, doesn't pay the bills when an emergency strikes. There is no substitute for having money set aside where you can access it without penalty when you need it. That doesn't mean borrowing against your home equity, your retirement account, or your credit cards. There is no better remedy for a financial crisis than savings.

It doesn't take walking to work or going hungry to improve your savings. The point certainly isn't to suffer, merely to be prepared. Put away only what you can afford, then leave it alone unless you really need it. Here are five tips for helping you establish and grow your savings:

1) Make savings a habit. Habit is a very powerful force, so why not use it to your advantage? Get in the habit of putting away some money. Make it a fixed amount at regular intervals. If your employer can automatically divert a portion of each paycheck to a secondary account, it's an easy way to get started. You may also have online banking options to let you schedule recurring transfers, such as the first of every month, between accounts. Whatever is most convenient and comfortable for you, make a savings plan and stick to it.

2) Put it out of sight, out of mind. Once you're setting that money aside in a savings or money market account, you don't want to keep dipping into it. One of the best ways to avoid that is to channel funds into an out-of-the-way account and forget about them. While the whole point is to keep your savings accessible, they don't need to be so easily accessible. If you're not being reminded of that money, you're not missing it--and not being tempted to spend it.

3) Take advantage of pre-tax opportunities. If you've ever heard the expression "pay yourself first," this is an excellent way of doing just that. Your employer may provide a number of benefits, including a 401(k) plan, health savings account, transit program, or others. These are deducted from your paycheck before calculating your income tax, so not only do they help you set money aside, they lower your gross income to provide a little tax relief in the process.

4) Trim a little expense fat. Most of us have something in the weekly or monthly budget that we could do without (or with less, at least). You could eat out one less time a month and put that money into a savings account. If that trip to the restaurant costs even $40 with tax and tip, that's $480 for the proverbial cookie jar. Not bad, in itself. If that cookie jar is a money market account with a national average 3.7% return, then you've got a little interest on top of that at the end of the year, making it $489.73. Keep at it for five years, and you have $2,640.02 without a whole lot of effort. And that's just from one reasonably priced dinner.

5) Find a better rate of return. Thanks to the Internet and sites like Bankrate.com, it's easier than ever to shop for a savings or money market account that can earn more interest. You don't like your bank's savings rates? There are FDIC-insured options out there that are providing comparable returns to CDs. You'll need to do your research, of course, before opening any new account to understand the terms and any potential fee structures. There are many offerings on the market, especially with the recent growth in online banking.

These are just a few ways to help sock away some money for that rainy day. They call it personal finance for a reason; your circumstances will dictate what makes the most sense for you. The most important thing is to use the good times to prepare for the bad. The more you save, the better off you'll be.

Sources

Aesopica.Net. "Jacobs 36. The Ant and the Grasshopper." http://www.mythfolklore.net/aesopica/jacobs/36.htm

U.S. Bureau of Economic Analysis. http://www.bea.gov

Bigda, Carolyn. "Break the bank: Go online." Money Magazine. http://money.cnn.com/2007/08/02/pf/online_banks.moneymag/index.htm

Bruce, Laura. "Negative personal savings rate: What does it mean?" Bankrate.com. http://www.bankrate.com/brm/news/sav/20060308a1.asp

Financial Advisor Magazine. "Savings Rate Data Somewhat Deceiving." http://www.fa-mag.com/news.php?idNews=776&id_content=4