People can easily be intimidated by the amount of money it takes to fund retirement. However, it all becomes more manageable if you approach building your savings rates the way you would build muscle in a gym — starting with moderate exercises, and then increasing the intensity as your ability increases.
Fortunately, life makes this process of ramping up seem natural, by placing savings tasks along the path of life in order of difficulty, starting with some easy ones:
- Saving your allowance. When do positive savings rates begin? For many people, the first transition from spending immediately to setting aside some money happens during childhood when they receive an allowance. This will generally be for a modest, short-term goal, but the fundamentals of positive savings rates are there — chiefly, budgeting and deferred gratification.
- Saving for a car. Moving from childhood to young adulthood, often the first meaningful savings goal on the horizon is to save enough money to buy a car. This will typically represent an investment in the thousands of dollars, so it will not only take more effort, but also an ability to see saving as a multi-year commitment.
- Saving for a house. Speaking of multi-year commitments, this notion really comes into focus when you start saving for a house. This will probably be the first time you’ve bought something that costs much more than you make in a year, so planning has to stretch out over several years. First you have to build savings rates up enough to accumulate a down payment, and then you have to maintain that budget discipline to make sure you meet your mortgage obligations, keep up with your insurance, and maybe even buy some furniture. Saving that down payment might be the first time you accumulate a significant lump sum of money, so for the first time you’ll have to face decisions such as spending time to find the best CD rates, money market rates and savings account rates to get the most out of your savings until you need them.
- Saving for college. The next major savings challenge may come when you have to put your kids through school. Is this really a bigger saving challenge than buying a house? It can be. The College Board estimates that for the 2009-2010 academic year, total annual expenses at a private four-year college for a student living on campus were $39,028. Multiply that by four (all the while keeping your fingers crossed that your child gets through college in four years) and it’s a commitment of $156,112. Then, if you have more than one child, start multiplying that total. College can definitely be a big ticket item, and given that student loan terms are generally shorter than mortgage terms, it’s at least as tough a challenge as buying a house.
- Saving for retirement. The right retirement goal for your lifestyle might be one million dollars, it might be two million, or even more. Still, you have the advantage of time. If you start early, retirement saving has a longer lead time than any of the above savings challenges.
In short, life’s savings challenges grow in size as time goes on, but that’s a good thing. It allows people to start small, and then tackle bigger challenges as they develop better savings habits.