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The seven ages of saving

October 12, 2011

| MoneyRates.com Senior Financial Analyst, CFA

In "As You Like It," William Shakespeare wrote of the "seven ages" of life, the different phases a person goes through over the course of a lifetime. It can be useful to break down saving money in a similar fashion. After all, saving money is always important, but you have to approach it differently at different stages of your life.

For example, personal savings rates in the U.S. have been a little over 5 percent in recent years. Is that high or low? It's probably too low overall, but whether it's right for you depends largely on what stage of life you are in.

To illustrate this, here are seven ages of saving:

  1. Saving up. This is saving as most people first encounter it as a child. There's something specific you want to buy, and you start saving up your allowance or wages till you can afford it. This form of saving is simple and direct, but still an important demonstration of how discipline can be rewarded.
  2. Stretching a paycheck. You may start out living paycheck-to-paycheck, but if you continue to live that way, you will always feel you are on a treadmill, running hard but going nowhere. Beginning with your first pay raise, make sure that each paycheck starts to stretch a little beyond the next payday.
  3. Emergency preparedness. Once you've started to stretch your paycheck, build a little cushion of savings for emergencies. As you do so, look for savings account interest rates that will add the most to your savings.
  4. Working towards multiple goals. Once you start to establish your career, your savings rates should not only grow, but your saving should become more goal-oriented. This means learning how to juggle short-term goals (your next vacation) with medium-term goals (a down payment on a house) and long-term goals (retirement).
  5. Maximization. From your mid-40s to your mid-60s, you will probably experience your peak-earnings years. These should also be the years where your savings rates are also the highest. Don't limit yourself to just meeting your savings goals; if you can exceed them, save the extra money. After all, you still have a long future, and the future is always filled with uncertainty. Now's the time to build wealth.
  6. Reset. Speaking of uncertainty, something unexpected is bound to crop up in even the most well-planned savings program: a career setback, or perhaps an expense you didn't anticipate. Don't let this get you out of the habit of saving; regroup, reset your goals to the new reality, and move on.
  7. Preservation. The goal in retirement should not be to spend down your assets; it should be to preserve them for as long as possible. After all, you don't know how long you will live, and if you can leave something behind to give someone else a boost in the early ages of saving, so much the better.

One overall lesson in all of this: Even as you move from age to age and the way you approach saving changes, the importance of saving remains a constant throughout your life.

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