Many make New Year's resolutions to save more money each month, but actually following through on this requires a lot more attention than a mere notion amid the heady optimism of New Year's Eve festivities.
As in many challenging endeavors, the devil lies in the details. It's one thing to decide to save and invest more, but it's quite another to muster the month-to-month discipline and take concrete steps to make good on this. At this point in 2014, you may have a creeping awareness of your lack of progress in realizing your saving/investing resolution.
To keep this resolution from winding up in the dustbin of unfulfilled promises to yourself, consider these points:
• Dedicate yourself. Putting money aside for savings and investment takes discipline — the discipline to not spend it. Some who haven't been saving can change their ways by pure force of will, while others need a coach or advisor.
• Pay yourself first. If the money is out of sight, it's out of mind, so you're not as inclined to spend it. Setting up a monthly automatic checking account draft is one of the best ways to save money because it's passive: You don't have to do anything. Instead of making 12 monthly decisions to save money every year, make one decision and set up an automatic bank draft each month. Too many people regard all of the cash in their checking accounts as cash on the launching pad for spending. But by using bank drafts, you can build up a surprising sum over time, especially if you increase your monthly contribution periodically. As Benjamin Franklin said, "Little strokes fell great oaks."
You can authorize a draft to a savings account or directly to investments, such as mutual funds and brokerage accounts; many of these arrangements allow drafts as low as $50 per month. If you would prefer to buy individual stocks, you might choose to direct your bank drafts to services like Sharebuilder.com, which enables investors to contribute small amounts toward whole or even fractional shares. This enables people who can't afford many shares of stock — or even one—to incrementally work toward stock ownership. Whether your incremental payments go into a fund or individual stocks, make sure that commissions and expenses aren't eating too much of your return. Be sure to read the prospectus and annual reports before you invest.
This arrangement has the advantage of enabling dollar-cost averaging — the practice of regularly investing a set dollar amount in a given stock or fund, rather than regularly buying a set number of shares. This means that investors buy more shares when the price is low and fewer when the price is high. Dollar-cost averaging reduces the risk of buying a large number of shares at the wrong time. Over a couple of years, dollar-cost averaging can smooth out returns because if the price is fluctuating, you are automatically buying more when it's down and less when it's up.
• Another "out of sight, out of mind" practice is making monthly contributions to a 401(k) account. This money doesn't even make it into your take-home pay because it's deducted off the top of your gross pay, so you don't pay taxes on this money until you take the money out during retirement. Despite this and the benefit of matching money that some employers put in these accounts as a proportion of your contributions, many Americans don't contribute the allowable maximum amount to their 401(k) plans, and they forgo substantial amounts of employer matching money.
If you're not sure about investing in the stock market, and your income is below $129,000 ($191,000 household), the new MyRA might be right for you. You can contribute up to $5,500 after-tax per year and the money invested grows tax free; but, if you withdraw the interest before age 59 1/2, you may be subject to tax and penalties on the gain. Unlike other investment plans, this new MyRA limits your options to a single fund that invest in governments bonds, which currently earns an annual interest rate of around 2.5 percent.
If you find yourself unable to save money and keep it saved, then you might want to hire a wealth coach or financial advisor to help you find money inside your current budget to save and more importantly, to hold you accountable to reach your goals. The key to not spending your savings and investment money is to set and steadfastly stick to a budget. Just as a personal trainer can help you realize fitness resolutions, a financial coach can help you reach your financial goals.
For extra motivation, you might want to read "The Millionaire Next Door." This is a classic book about attitudes toward money, financial discipline and the personal qualities that make the difference between acquiring wealth and having little to show for years of work--regardless of your income. The concept of discipline is reflected by the title, which indicates that these self-made millionaires don't seem different from people of lesser means because they live in modest homes and drive inexpensive cars. Who knows, with a little discipline, maybe you'll end up the next "Millionaire Next Door."
This column is the opinion of the author and in no way reflects the opinion of ABC News.
Byron L. Studdard, a CERTIFIED FINANCIAL PLANNER™ practitioner, is founder and president of Studdard Financial, LLC, a financial advisory firm in Sarasota, Fla., dedicated to helping clients build wealth, protect it and pass it on to future generations. Studdard is listed in the Guide to America's Best Financial Planners (published by the Consumers' Research Council of America, an independent research organization). He can be reached at Byron@studdardfinancial.com. If you have a question for him, send him an email and he will try to answer it in an upcoming column.