Successful Investing Starts With Saving

I can't think of another strategy that will give you this kind of long-term, very low-risk twofer. And frankly, looking at trends in inflation, interest rates and the dollar over the next few decades, I think all investors will need every edge they can get -- and not just those who are contemplating retirement soon.

What is this miracle savings strategy? I knew you'd ask.

First, Find Dependable Savings

It starts where all savings strategies start: with you poring over your budget, looking for places where you can spend less or nothing at all. But in this search, you're looking for something very specific: a savings annuity.

Most savings advice suggests that you start with easy substitutions that will reduce your spending. Bring lunch from home instead of buying it near the office a couple of times a week, for example. Advanced savers move up to actual denial. Skip that double latte at Starbucks.

I understand this advice. Saving is hard work. It's easier when each individual sacrifice is small. And small sacrifices do add up. Consider that in October, the personal savings rate in the U.S. fell to just 0.2% of disposable income. Except for the statistical fluke in October 2001 caused by September's terrorist attacks, it was the lowest monthly level ever recorded, stretching back to the start of the survey in 1959.

At that rate, calculated Lehman Brothers economist Drew Matus, an individual with an after-tax income of $40,000 saved, on average, $1.50 a week. Saving the cost of a Starbucks latte would represent a huge improvement.

But this kind of savings isn't well-suited to an investing strategy, because the cash flow it generates is so undependable. The decision to save must be made over and over again, week after week, to reach an investable amount like $50. And the money saved must make it from your pocket into some kind of investment account without being hijacked by some other consumption temptation.