Keeping Focused: Saving for the Long Term

by Adam on March 17, 2010

Focus is important when it comes to growing your pennies. In the first article on ‘Focus’ Magical Penny explored different strategies of paying off debt. In the second article the subject was on how to focus on medium term goals with a time frame of 1-5 years. We now move onto how to stay focused on longer term saving plans!

plant the seed of wealthFor most of us, just staying focused on things right in front of us is hard enough. The first challenge is to consistently spend less than your monthly expenses. Then you need to pay off costly debt and start saving for emergencies and opportunities and irregular expenses like a holiday every once in a while.  With all these different priorities it might seem impossible and even pointless to save for yet another goal: your long term future.

Maybe you find it hard to focus on it because it’s so undefined, or you think that you’ll never retire. But you should focus on planting the long term seeds of wealth: even if you’re in your 20s.

If not now then when?

The number one reason to focus on your long-term savings is because of the potential impact you can have by making progress today. It really is huge thanks to the magic of compound interest. There will always be things to save for and expenses to be paid but if you make a commitment to yourself today then you won’t wake up 40 years from now with nothing to show for your efforts.

There’s always something that makes demands on own finances in the present.
Perhaps it’s saving for or paying off a car, or saving for a house deposit or paying off a mortgage. And I’m sure my readers with children will confirm that raising them isn’t without cost. Do it now when your expenses are likely to be lower than at any other time in your life.

A small income shouldn’t stop you: You can still have a big impact because of time

By starting to save for long-term needs in our 20s we have the luxury of time. We also have a chance to work out the best ways to save our pennies and find what works for us. The impact that saving and investing over the long term was the primary motivation for founding Magical Penny. If everyone understood and appreciated the power of compounding returns I’m positive that more people would make an active decision to take control of their finances. At this stage, don’t worry about the specifics of how to save over the long term –that’s coming soon, but if you’re reading this, I really hope that you begin to make a commitment to save for the future now, before life gets any more complicated….and it will!

How to keep Focused -Visualisation

Medium-term saving, perhaps for a house or a car, can be hard but at least it is easy to visualise as the ‘destination’ is only 1 – 5 years away. Visualisation is a powerful tool to remain focused and you should use it when you can to reach your goals.

However, when it comes to long-term saving, visualisation is harder for some. But it’s worth thinking about as it will help if you decide what you want your life to look like in decades to come. Do you want a big house, an early retirement or a shiny sport-car? Maybe none of the above, but believe me you’ll want to have options. Even if your dreams are less grand, having a clear vision of what your life will be like in the future will help you plan to get there. If you do have a vision, write it down for reference. Having it down in black and white will cement your ideas and help you save for it month in, month out.

That said, I have a confession: I find it difficult to imagine what my life will be like in 5 years, let alone 40! I feel I have so many different paths I could go down. Maybe you feel the same? Don’t get decision paralysis and a lack of long term vision on the specifics stop you though: If you’re like me just remember that long term savings have huge potential to turn your pennies into significant sums if saved and invested properly. Even if you don’t have a good idea now, I’m sure you’ll be able to find something to spend your pennies on when the time comes. And you’ll appreciate that you have given yourself a head-start when you see an opportunity or more specific dreams begin to form in your mind.

Make it automatic

set it and forget itSurprisingly the best way to stay focused on long term savings is actually to not focus on it at all. Your motto should be ‘set it and forget it’. It really should be ‘set it, forget it and review it from time to time’ but that’s not quite as catchy is it?

Decide on a certain amount of your monthly budget and set up an automatic standing order into a savings account. In the coming weeks Magical Penny will also walk you through the process of setting up a direct debit for investing as well, putting your long-term plans on auto-pilot. But don’t worry about that for now: just get used to giving yourself a minor reduction in your income each month and channel the pennies destined for long-term savings away from your current account into a seperate savings account. Remember the first point though: don’t wait for a better time to begin, do it today (or next pay-day).

As a bonus remember this previous post and take advantage of any employee pension schemes (or 401ks in the US) to get extra pennies from your employer in the form of a company match: they really are the true magical pennies!

How does everyone else stay focused on long term goals?

Recommended Reading:

Carnival of Personal Finance – Tour of Ireland Edition

Magical Penny is editors pick this week for Are 0% interest Loans Really Free Money?

Financial-priorities: focus-vs-diffusion @BalanceJunkie

A great article on a similar theme to Magical Penny’s Focus Series:

“My personal preference is to choose focus over diffusion. I feel better when I can see significant progress on one goal rather than a little progress on many goals”

Why 20s somethings should open Roth IRAs @PersonalFinanceNinga

Best Rate for Roths @PT Money

Are you Young and American? You should definitely be reading why Roth IRAs are awesome.

UK readers -it’s worth a read too: Just  replace the word: Roth IRA with ‘Stock and Shares ISA‘ and think how lucky we are- we get all the tax benefits but are not limited to saving only for retirement! If all that went above your head don’t worry, Magical Penny will be moving onto ISAs shortly -just in time to embrace ISA season and the end of the tax year.

Exciting times.

{ 3 comments… read them below or add one }

2 Cents @ Balance Junkie

As someone who just turned 40, I can tell you that the years between 20 and 40 go by much more quickly than you might think. It’s so easy to get caught up in your day to day life and forget to make provisions for your future. (I can also verify that if you have children (especially boys), your grocery bill will not increase right away. But once they hit 11 or 12, look out!)

Making savings a habit early on is the key. Even if you can’t save a ton, figure out an amount you can manage and follow Adam’s advice: set it and forget it. As your income (hopefully) increases, beware of lifestyle inflation and avoid debt like the plague. Make sure a percentage of that extra income goes to boost your savings rate.

Thanks for the mention Adam!

Kate Newby

Having part of my paycheck automatically deposited into my savings account is the best thing I have ever done. I now save $300 a month – which I tend to need for car repairs and other emergencies throughout the year. Unforunately I am not near my goal of having $3k but at least I am trying and don’t have to put things on a credit card when they pop up.

Great article!

Adam

@2 Cents -if the next 6 years goes by as fast as the last 6 years I’m going to be 30 in no time at all -that’s why I think more 20 somethings should stop waiting to be in a better position to save, and actually just start.

Great comment so thank you. And I’m sure my Mum can testify to household grocery costs growing exponentially when I was a teenager!

@Kate -I’m so pleased you found a strategy that helps you deal with those unexpected expenses that come up. I think most people are too optimistic about their spending when they first make a budget, or when they are asked to reflect on their spending -it’s easy to forget to budget in extra costs that come up -I’ve certainly not mastered it -but like you, having a savings ‘cushion’ helps enormously. Thanks for adding your perspective Kate 🙂

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