Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, June 14, 1993 TAG: 9306140046
SECTION: BUSINESS PAGE: 6 EDITION: METRO
SOURCE: BY STEPHEN ADVOKAT KNIGHT-RIDDER/TRIBUNE
DATELINE: LENGTH: Long
However, not everyone has the self-discipline to put a set amount - $50, $200 or more - into savings each week.
Many investors have to be forced into saving, so we look for ways to lock ourselves into the savings habit.
One popular method of forced savings is to buy U.S. Savings Bonds through a payroll deduction plan. You decide how many bonds you want to buy each week, and the company's payroll department automatically debits your paycheck.
Many consumers believe that since they never get the money in their paycheck, they don't miss it as much. They believe that's the only way they'll save.
U.S. Savings Bonds are fine. You can count on at least a 4 percent return. However, they are only one of several ways to force yourself to save.
Here's a short review of other ways that may provide even higher returns:
\ Employer 401(k) With all the tax benefits involved, there likely is no finer place to put forced savings.
Employees can set aside as much as $8,994 this year into a tax-deferred retirement account. The money you designate is set aside into the long-term retirement account before you pay income taxes on it.
You'll eventually have to pay taxes on the money once you withdraw it. That's not likely to happen until you retire, and, ideally, your income drops along with your income tax bracket. If you can shelter money that otherwise would be U.S. Savings Bonds are only one of several ways to force yourself to save. taxed at 28 percent or 31 percent, for a time later when your income tax bracket might fall to 15 percent, you're that much ahead.
The benefits of forced savings through a 401(k) can be even sweeter.
Many companies will match employee contributions into a 401(k), sometimes 50 cents for every $1. If your company throws in 50 cents to your buck, it's like earning an immediate 50 percent return on your money.
Remember, however, that with only a few exceptions, you can't withdraw the money before age 59 1/2. If you do, you'll have to pay income taxes on it plus a 10 percent penalty.
Because this is all handled through payroll deduction, many workers find this a painless way to save.
\ Pay down your mortgage Want to make more than an anemic 3 percent on your CDs or money market accounts?
Consider a 15- or 10-year mortgage rather than the more conventional 30-year plan.
A shorter mortgage builds up equity more quickly. You'll also spend less on interest over the life of the mortgage with a shorter term. The forced savings aspect kicks in because of stiff penalties associated with missing a mortgage payment.
Finally, you can probably shave a quarter of a point or more off the interest rate with a shorter mortgage term.
If you don't want to refinance to a shorter mortgage, consider making additional payments on your existing mortgage.
Suppose you have a 9 percent mortgage. By sending in, say, an additional $50 to be applied against the principal, you'll pay off the mortgage sooner, save thousands of dollars in mortgage interest, and in a sense earn 9 percent on your $50.
\ Automatic investment plans Many mutual fund companies have started automatic investment plans that regularly debit your checking or savings account and transfer the money into the fund.
You designate how much you want to invest monthly. With many plans, it can be as little as $50 a month. Better yet, there are no penalties for stopping or for taking the money out.
\ Dividend reinvestment plan As many as two-thirds of the companies that make up the Standard & Poor's 500 index offer dividend reinvestment programs or DRIPs. Tell the company to do so, and it will automatically reinvest your dividends back into the company.
Not only is this a forced savings, presuming you would spend the dividends otherwise, but it forces you to buy stock at regular intervals.
Because of the ups and downs of the stock market, this method means that sometimes the reinvested dividends will buy shares when they are pricey; other times they will buy shares when they are a bargain.
This process is called dollar cost averaging, and over the long haul, you'll likely pay less per share this way than if you tried to time the market.
Another plus is you buy the shares without paying broker fees. However, when it comes time to sell the stock, figuring out the price of each share could be hard.
\ Contractual mutual funds Once fairly popular, these mutual funds are, thankfully, falling into disfavor.
They work like this: You agree to regularly invest a certain amount of money into the fund. The forced savings comes in because of stiff penalties involved if you back out.
Add to that commissions in an age when there are hundreds of commission-free mutual funds, and you have, perhaps, the least attractive forced savings mechanism.
The difference between these and automatic investment plans is that while you agree to make regular contributions to an automatic investment plan, you are not obligated to. You can generally stop whenever you want to.
Another difference is that several no-load or commission-free mutual funds offer automatic investment plans. Any money you don't have to pay in commissions is money that can work for you in the account.
by CNB