More On The Only Savings Strategy You'll Ever Need

In August, 2006, I wrote a simple post The Only Savings Strategy You'll Ever Need. My point was that one needed to "pay yourself first" to create a successful saving strategy. After blogging on personal finance for the past seven months, I realized I needed to provide a little more detail. So here is the more in depth explanation of my saving strategy:

1. Pay yourself first from every paycheck. One should do this before paying the rent or mortgage, utilities, credit card payments, student loans and living expenses. If one can't pay yourself first and pay all the other bills, start reducing one's costs in the other areas. It's as simple as that. Or so I thought.
   
   After seven month of blogging and reading other's posts, I realized that I was making an assumption that wasn't clear to everyone. Hence, I've added#2.



2. Don't touch funds from #1. Yes that's right. Once you pay yourself, consider that money gone. It should be not different than paying one's rent. Once paid the money is no longer available.
   
   Breaking this rule will happen, but it should be the exception and not the rule. Regularly raiding this account to fund bills and livings expenses means that one IS NOT following this strategy correctly.



3. Invest and grow the funds. Of course, one can't let the funds just sit. Inflation would eat away at it. The big questions are in what to invest, and how much risk to take. Here are some simple answers to the questions.
   
   The Really, Reallies - This article talks about your choices: CDs, Stocks, or Real Estate. I personally like CDs and Stocks.
   
   Investing 101 - Managing Risk Successfully - Investing can be scary. Instead of fearing investing, learn to manage the risk associated with investing. There are several types of risk and this post explains how to minimize negative impacts for these risks.
   
   In my personal portfolio, my current allocation among stocks/fixed income/cash is 34%/28%/38%. As I have noted before, I have a lower risk tolerance profile and use a strategy that preserves my principal. In my company retirement account, my allocation is about 75% company stock and 25% cash.

This concludes my update of "The Only Savings Strategy You'll Ever Need." It has worked well for me. I hope the description provides some insights that one can use.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

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This is not financial advice. Please consult a professional advisor.

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