My Foolish colleague Roland Head put together a useful article recently outlining how much money you need to save each month to accumulate a million pounds by the time you are 65.
He assumed the money you put aside will earn an annual return of 7%, which is a long-term average for investments. The bottom line, he concluded, is that you need to save £272 a month if you are 20 now, £569 if you are 30, £1,254 if you are 40 and £3,183 if you are 50.
You can see how this is going, right? The message is clear: start saving as soon as you can. Start saving NOW, whatever age you are.
But how do you save money when there are so many demands on your income in today’s world? Sometimes it seems that everything comes at a price, from parking through to peeing. Many times, there is more month than money! Well, here’s a four-point plan to help you get on track with saving.
1. Take an interest
I reckon it really helps if you get interested in your money-life. I know money is only a means to an end, but I’ve found that the more I dig into my personal finances the more interesting it becomes.
For example, it became a challenge for me to get ahead of the utility companies and always be on the best deal I could find. Later on, I became an ‘expert’ on the best cash savings account interest rates. I knew all about savings bonds and ISAs, pensions and endowments. And later still I dived into the exciting world of stock market investing.
If you treat it as an absorbing hobby and allocate regular time to it, you might be surprised how fascinating managing your finances can become.
2. Live below your means
This is an old message but an important one. I don’t think anyone ever really gets rich without first making a point of spending less than they earn each month. It’s the only way you’ll have enough left over to make regular savings. And regular, consistent saving is the key.
You don’t have to live a frugal life but do watch out for lifestyle-creep, which leads to spending more and raising your lifestyle with every pay rise, promotion or windfall.
3. Treat saving like an unavoidable fixed cost
Saving some money every month needs to become your priority. However, it’s always going to be tempting to skip a month when other bills and demands for your money are piling up.
But if you treat your monthly payment into your savings like any other fixed cost that’s unavoidable, it could encourage you to keep up with your saving. It’s all about how you think about saving and a small change in attitude could lead to saving success.
4. Compound your money
The principle of compounding means you can make your savings work really hard for you. Compounding in a savings account means you earn interest on your money, the interest earns interest and so on. But it works well on the stock market too. Shares tend to pay dividends and if you reinvest them, you can earn dividends on the dividends and so on.