Q: We want to save money for our future and we try to keep our hands off a portion of the money in our checking account, but it’s not working.  Each month we seem to dip into whatever we wanted to set aside.  There has to be a better way.  What’s your advice on the best way to save money for the future?

A: Most young people are baffled by how to reach their long-term financial goals such as paying for their children’s education, buying a house, or planning for retirement.  The best way to achieve these objectives is to accumulate faithfully — experts suggest 10 to 15 percent but even small percentages add up — over time and to invest the money to insure that funds are preserved until you need them.

It is no secret that the sooner you get started, the greater your return will be.  For example, if you invest $1,000 annually at 5 percent interest, you will have $5,525 in five years.  But in 40 years you’ll have $120,800.  It all has to do with compound interest, or “interest on interest.”  That is, if the interest (earned on an investment) is itself reinvested, this investment of interest will itself earn interest. 

Think of it this way. Suppose you could invest $100 per month at 10 percent compound interest.  Then, after eight years, suppose you began to withdraw $100 per month (making no further deposits).  How long could you continue such withdrawals before exhausting the principal?  Eight year?  Sixteen years?  Twenty-four years? 

The answer is forever. This is because in eight years you would have doubled your money.  Therefore, for every $100 you put in you would have $200 eight years later.  You could withdraw this $100 each month forever, leaving the principal untouched. A good investment balances three factors: safety, yield, and growth. 

If an investment is safe but provides a yield less than the rate of inflation and no growth at all, it is obviously a poor investment.  If the investment provides safety and a relatively high yield but fails to grow with the economy, it is also a poor investment.  Finally, if growth is phenomenal and yield outstanding but the risks are great, it s obviously a poor investment; in fact, this is properly called “speculating” rather than investing.

One classic investment is bonds, which pay a fixed rate over their lifetime.  The drawback to bonds, however is that this fixed rate might look good at the time of purchase but may not be adequate in a time of rapid inflation.  Stocks are another traditional investment vehicle.  Since they are unpredictable, however experts advise that no more than 5 percent of one’s investment funds should be put into any single stock.  

Also, since it is difficult for the nonprofessional to keep track of a great number of stocks, one solution is a buying shares in a mutual fund (rather than an individual stock).  A mutual fund is an investment company that pays a professional money manager to buy stock in anticipation of its rising value and sell it when it appears to be near its peak value.  When you buy a share in a mutual fund, you buy a share in the entire portfolio of stocks the fund owns.

When it comes to making a sound investment, beware of get-rich-quick schemes and remember the three cardinal principles of investing: safety, yield, and growth — with safety of paramount importance. 

Finally, begin your investment program as early as possible to take advantage of the growth-on-growth feature of compound interest, invest regularly, be patient, and seek the help of a trusted money manager who can give you sound advice for your particular situation. 

---

Les Parrott, Ph.D. is professor of psychology and founder of the Center for Relationship Development at Seattle Pacific University, and bestselling author of Love Talk, Your Time Starved Marriage and the brand new Crazy Good Sex. 

Dr. Parrot has been featured in the New York Times and USA Today.  He’s appeared on The View, Good Morning American and Oprah.  His website features more than a 1,000 free video Q&A pieces.  To learn more, visit RealRelationships.com.