I've talked to a number of people who say they have a hard time saving money, not just for investments, but even for a stable emergency savings account. The excuse I hear most often is that they don't know how to save. The easiest commitment I recommend is for people to not buy anything unless they have cash to pay for it. Buying on credit doesn't seem to slow down the buying impulse as much as actually handing over cash does for a lot of people. While using a credit card can earn reward points, that's a secondary concern for anyone who is not saving for the future. I also recommend my clients tell me what they would do if they were out of work for three to six months. That can get some people in the mindset of understanding the importance of having an emergency fund available with at least three months of expenses and preferably six months. The next step is to get people to start thinking about retirement as something that isn't impossible, but more of something that can be a reality if they start saving immediately. How much they need to save each month can vary depending on age and spending habits.
Treating savings and investing deposits like a bill that has to be paid monthly helps some people allocate a portion of their take home pay away from just spending on whatever passes in front of them. Assuming someone is not under water with their fixed expenses (bills, food, house maintenance, etc) compared to their income, I advise starting their saving routine with a small amount and growing from there. This slow approach tends to help people stick to the plan rather than getting burned out too quickly. I can usually talk people into taking just 2% of their take home income and putting it into a separate account. Once they get in the habit of doing that I ask them to increase it to 4% and so on in 2% increments every six months until they get to at least 10%. 20-30% is even better. I’ve found small incremental increases are much easier to digest for people who are not used to saving. Once they get used to saving many people get addicted to it and find it easier to do as the start to enjoy seeing their balances grow. I suggest these new savers don't think of what they are going to buy with this nest egg once it gets to a certain amount, but to think of it as money they can't touch unless they are unemployed or have reached retirement.
I also recommend that if anyone gets a raise to put half of the increased income into savings/investments each pay period. This allows some of the good feelings that come from earning the raise and having more money and also makes the increase savings contributions less noticeable. If someone new to the workforce starts this approach with his or her first job they are quickly saving up to 30% of their after tax income by the time they reach 30 years old and can start doing some realistic planning for an early retirement, even before they are able to tap into their IRA and 401k accounts at age 59 1/2.
Increasing savings early in this approach helps people on two fronts. First, they increase the time value of their money with the compound interest benefits of time. Second, they keep their expenses low so that in retirement when income levels drop, they don't feel a hit in their lifestyles. For anyone not at the beginning of their career, it's not too late to start saving. Any amount saved each month will help you down the road. Delayed gratification isn't always fun when starting out, but the reward later on is worth it. Stick with saving as if you don't have a choice and you'll be happy you did.
