You've probably run across advice suggesting that you start piling up your retirement savings beginning the first day on the job, or urging you to start saving for your next car the moment you purchase a new vehicle. In California, a few state senators want to turn that advice into law by giving $500 to every child born in the state beginning next year.
The senators want each child to have a savings account, free from income taxes, that the family could keep building upon as the child aged. The money would have to be used for college or continuing education, a down payment on a home, or retirement.
It's not a completely free lunch, however, because the child would have to pay the original $500 back to the state when he or she turned 18 years old.
I'll ignore whether it's a good idea for the state to be giving cash to every newborn -- you can have a spirited debate over that question at dinner tonight. However, the proposal does point us toward some important aspects about saving:
Start. Sometimes the hardest part about getting anything done, including saving money, is just getting started. Opening an account and putting a few dollars aside can make the difference between establishing a commitment to save and procrastinating for years.
Let that time slip by, and you won't be able to recapture the returns on the money you could have saved. Don't get too worked up if you're getting a late start, however. There's no time like the present! That said ...
Start early. The earlier you can start, the more money you'll have for your eventual goal. If these California families did nothing but watch the original $500 grow, earning about 5% per year, they would have $1,203 when the child turned 18 years old.
Imagine, instead, that these parents put an extra $100 in the account every month. In that case, the account would grow to $36,148 in 18 years. If those same parents had waited until the child got to kindergarten to make their initial $500 savings contribution and then started adding to it by $100 each year, they would have only $22,867.
Even modest savings can make a big difference over time. If our California parents had been given $500 when their child was born and then saved only an extra $25 each month, the account would still grow to almost $10,000 in 18 years.
Have a goal. Putting aside money for the future means giving up something now. It's often easier to do that when you have a goal in sight, such as retirement, a home, or college.
But, it can also be something much smaller. Anticipating a big-ticket purchase can turn the laziest saver into a diligent penny-counter. If you're having trouble motivating yourself, make sure to set out your goals and know why you're saving and how much you'll need. Doing so will make it a little easier to trade satisfaction today for satisfaction tomorrow.
Maximize your time. If you're saving for the true long term, you might even want to stash a little bit of your money in stocks. If you're not comfortable picking from among the many companies out there, you can own a little bit of them all with a low-cost index fund.
That style of investing can offer instant diversification, especially if you pick a fund like the Vanguard Total Stock Market Fund (VTSMX). With it, you'll own a piece of hundreds of companies, ranging from household names such as Procter & Gamble
Of course, you don't need the government to make the first move for you if you want to start building your savings. If you open a savings account (or maybe even a college savings fund) when your child is born and contribute to it regularly, you can build up a sizable nest egg. Just get started.
If you can't imagine where you'll find any extra money to save once your bundle of joy comes along, check out these other Foolish articles:
Fool contributor Mary Dalrymple welcomes your feedback.