The easy street to financial security

You don’t have to be Warren Buffett to secure a decent nest egg. Saving early and often is more important than picking the right investments.

Question: I will be graduating from college in May and starting my first full-time job. I want to start saving correctly so I can prepare for my future. What is the best way to do this? —Matt, Lansing, Michigan

Answer: Before I give you an answer, let me just say that I love your question. Why? Well, most people looking for advice about saving for retirement or achieving financial security immediately begin asking about investing. How can I find the best stocks? Which mutual funds should I buy? Foreign stocks or domestic? Taxable bonds or munis? Real estate or gold? The presumption is that the road to wealth and security starts with picking the best investments.

You, on the other hand, are seeking advice about the true way to improve your odds of achieving financial security: adopting a disciplined savings strategy. I don’t want to suggest that investing isn’t important. Clearly, you want to earn a decent return and see your money grow. But what you really need to rev up the engine of wealth generation is regular saving. If you don’t have a decent sum to invest, then all the investing savvy in the world, to paraphrase Bogey in Casablanca, won’t amount to a hill of beans.

Indeed, researchers at Putnam Investments did a neat study a couple of years ago that illustrated this simple truth. They created a hypothetical “Average Joe” who not only contributed very little to his 401(k) but also had the misfortune of investing too conservatively and being a lousy fund picker to boot. They then examined the effect that a better asset mix, wiser fund choices and a higher contribution rate would have on his 401(k) balance. Each move increased his account’s value. But contrary to what most people would expect, the biggest boost came from plowing more dough into his 401(k).

Unfortunately, many people don’t seem to grasp the concept that it’s all got to start with saving. So instead of living on less than they earn and sock away money on a regular basis, they live large, run up their credit card debt, borrow against their home equity - and then obsess about getting a high return on their paltry savings.

Which brings me back to you. You seem to get it. Your question suggests that you understand that to assure your financial future you’ve got to get into the habit of regular saving today.

So how do you do that?

The single best way is to sign up for your 401(k) or similar plan at work. The beauty of workplace retirement savings plans is that they make saving automatic, which allows you to set the money aside before you get a chance to spend it. Whether your company offers a regular 401(k) or a Roth version, sign up and then try to contribute at least enough to take full advantage of any employer match.

One caveat, though. More and more 401(k) plans these days automatically put you into the plan. That’s good, especially for young people like you who are more likely to skip enrolling since retirement seems like a far-off mirage. But the default contribution rate may be something like a measly 3% to 6%. You’ll probably want to do more. Consult an online calculator if you're not sure how much.

If you don’t have access to a 401(k) or similar plan - or you want to save more to increase your odds of achieving financial security - you can sign up for an automatic investing plan at most mutual fund firms. You agree to have a certain amount - say, $50, $100, $500, whatever you can afford - transferred from your checking account into your fund account each month. You can do this with a fund that’s part of a traditional IRA or Roth IRA account (assuming you qualify, or you can invest in a fund in a plain old taxable account.

Now, if you’re one of those types who is motivated enough to sign up for your 401(k) or open up an automatic investing plan simply because you know it’s the right thing to do, good for you. But some people need more incentive. Some of us may even have to resort to fooling ourselves into saving. If you're one of those people, you may want to check out some additional savings techniques I outlined in a recent column. Some of these techniques are a bit, shall we say, unconventional, like creating a contract to save a certain amount each month and agreeing to pay a penalty of $100, $500 or whatever if you don’t reach your target. But sometimes you gotta do what you gotta do to sock those bucks away.

Again, I don’t want to suggest that you should ignore investing. But all you really need to do to succeed on that front is settle on a reasonable asset mix, invest in some decent low-cost funds like those in our Money 70 and then make sure you don’t sabotage yourself by buying into the fads and gimmicky products that Wall Street specializes in churning out.

So start saving early and often. If you do that, financial security will follow.