Jupiterimages
Two perennial New Year's resolutions centre around physical and fiscal fitness.
Do you buy new belts, or join a gym? Or perhaps you might start going to the gym you're already a member of but haven't set foot in since March of last year. When shrinking your mid-section, your perseverance can't waiver throughout the year, otherwise your results may be poor, or even worse, non-existent.
But when it comes to fattening up your purse, a little pain for a short period of time might lead to everlasting gain.
Going to the gym on a regular basis requires real effort each and every time. Putting money away for the future on a regular basis only requires effort once. By setting up a regular transfer to a separate savings account, the act of saving becomes automatic. Imagine if you could lose two pounds every month by having someone else sweat it out on a treadmill every other day.
You can find lots of calculators that will extoll the value of putting regular savings into an investment portfolio. For example, setting aside $100 per month from the age of 18 until 65 to a portfolio that will grow at a rate of 5 per cent per year will net you more than $200,000.
Whether you've heard this all before but haven't started, or if you are already an automatic saver, here's a bit more food for thought.
Haven't started yet
I know many people who delay starting an automated savings program because they think they need to be able to put away a few hundred dollars a month to start. But you can start with a very small amount. Even $10 from every paycheque might be all that's needed to form the habit.
Seeing that savings account balance increase over time is a positive reinforcer. If you can show you can stick with it, soon your account will be large enough to consider investment options. But for now, just stick with a simple, no-fee, high-interest savings account.
You can also try the baby-steps approach. Pick a large ticket expense that's coming up in the next few months or year. If you spent $1,000 over the holiday season, divide $1,000 by the number of paycheques you receive in a year and set up your automatic transfer. For example, if you get paid every two weeks, $1,000 divided by 26 is $38.46. Round it up to $38.50 or $40. Once you see how easy it is to be a saver, even if for the short-term, it might be enough to persuade you to become a saver for the long-term.
Keep in mind that if you carry a balance on your credit cards, you're better off aggressively paying them down before starting a savings plan.
Already saving
Our $100 per month saver might be stretched to find that money at the ripe young age of 18, but as people get older it is natural for them to have more disposable income and increase the amount they save. Keep in mind that as our saver approaches retirement, $100 will be worth about $25 in today's dollars from the loss of purchasing power due to inflation.
If you are already an automatic saver, increase your contribution amount every year. If that same 18-year-old increased his contribution rate by 5 per cent every year, his nest egg would be worth more than $500,000 by age 65. When he turns 19, he would increase his contribution to $105 per month. At 20 it would increase to $110.25 (a 5 per cent increase on $105 is $5.25). This little annual tweak can result in a big impact to your wealth.
And there's no reason to limit the increase to 5 per cent per year. Increase it enough that you feel a bit pinched with your cash flow again, just like when you started. That annual little fiscal pain will translate into steroid-like gains for your wallet.
Preet Banerjee, a personal finance expert, is the host of Million Dollar Neighbourhood on The Oprah Winfrey Network and author of the new book, Stop Over-Thinking Your Money! Follow him on Twitter at @preetbanerjee.