Preparing to Invest: Be a Saver

You can't build real wealth and financial security if you are not regularly saving money. Yes, you can "own" a really nice car and a big house by the water by borrowing, but that debt is a liability that you'll never pay off if you are not saving.

Borrowing money to invest is a risky prospect too. Suppose your lender is going to charge you around 5% in interest. This is payable no matter how your investment does. Lose money, and you still have to pay interest on your loan (and eventually pay back the principle as well). And when you make money, considering that stocks average 8 to 10% annual gains in the long run, a 5% bite for interest payments is substantial.

Controlling your costs and spending is key to saving. Contrary to what advertisers imply, you do not automatically deserve to have the latest and greatest just because people around you are getting one. It does not serve you to envy them. If you can afford it, by all means, go ahead. But recognize when you cannot afford it (hint: if you can't pay for it with cash, you probably can't afford it. If you have to dip into your emergency fund, you probably can't afford it.) You don't need to keep up with the Joneses when chances are, under the nice shiny exterior, the Joneses are broke.

So how can you save? If you have the will, you can set a percentage (I suggest at least 10%, but the more the better) of your income to try and set aside as savings. Then look at your spending patterns and separate your needs and wants. Cut down on your wants to achieve your savings goal. Adjust what you spend on your needs (are there lower cost alternatives?) If you need a bit of help, try a "forced" savings plan by automatically depositing your savings goal into a savings account (like a high interest savings account). Places like ING Direct offer such a service (ING calls theirs the Automatic Savings Program).