Carmen's Five Rules to Save More Now

If we want this financial crisis to teach us anything, it should be that we can do ourselves a great service by looking to the past, Carmen said on Monday’s show.

“It’s all about becoming a savings generation again,” she said.

How can we emulate the men and women of the Greatest Generation? The people who fought and won World War II, then helped create lasting prosperity with strong personal savings rates. In 1960, the average American saved 8% of their annual income. This year, our savings rate fell into negative territory. They had it right, and now it’s up to a new generation to carry the torch of savings and responsible spending.

Carmen offered five rules to help you start saving again. These rules work just as well if you’re right out of college looking to start a nest egg or preparing for retirement. They won’t change. Ever.

Rule #2: Find the money. It never seems likely at first, but there is always more you can save. Carmen knows from her own experience as a grad student with little money how tough it can be to scrape, but she learned how to sacrifice and put something away for the future.

Rule #3: Know yourself.
If someone gave you $20 right now, where would it be in an hour? In your wallet or a cash register somewhere? Figure out what motivates you and apply it to saving. If you’re competitive, consider a “Save $100 a week” contest as motivation. Or maybe even a simple game where you put away every $5 bill you come across.

Rule #4: Your mattress will eat your money. If you’ve got cash just lying around, collecting dust and not interest, then you are losing money standing still thanks to inflation. Costs rise every year, so a dollar this year will be worth only 96 cents or so next year. That is why you should keep every dollar you have in an FDIC-insured bank. For your liquid savings – like an emergency fund – put it in an account that earns interest.

Rule #5: Paying off debt is saving. If you carry a balance on a credit card (or two or three), you are losing money. If, for example, you’re paying 17% interest every month, that is 17 cents for every dollar of your debt you’ve got to add to it. If you pay it off, think of it as saving 17%. Do it!

Another mini-rule: You have to crunch your numbers to see what’s actually saving you money and what isn’t. For instance, refinancing will save you big bucks over time. Figuring out a way to lower your ARM by a single percentage point or moving debt onto a lower-interest card means more money staying in your account each month.

Following these rules is tough, Carmen admitted. But when it starts to work and you find yourself putting more away, it will be one of the most rewarding experience in your life.