Successful Investing Starts With Saving

Don't misunderstand me: I think this kind of savings is great and crucial: It's the difference between buying holiday presents for cash and putting them on a credit card. And it can add up to really big sums. But this kind of saving is better suited to saving for delayed purchases, where missing a week or $10 won't throw off the whole system, than it is for investing.

A savings annuity, on the other hand, is a larger (minimum $50), regularly repeated cash savings that can be automatically diverted to an investment account.

Make Saving Automatic

Here's an example from my own recent personal budget. Last month, as I sat down to write a check for the two storage rooms I rent to stash the accumulated overflow of things from my New York apartment, I stopped short. I hadn't visited either room in months, so how much did I really need all the stuff I was paying to store?

After a hard and dirty day's labor I managed to throw away enough that I could consolidate the two rooms into one. Savings: $74 a month, every month. And once the room was turned back to the storage company, it was hard to undo the savings.

I'm sure you can find similar savings annuities in your life. I'm looking at my phone and cable bills to see if I can cut the costs of those services, at my homeowners insurance to see if I can find a cheaper policy, and at my brokerage services, where I've just consolidated and moved two accounts to save monthly service fees.

Of course, that $74 isn't saved yet. If it just gets commingled with the rest of the money in my checking account, I'm pretty sure I'll wind up spending it without even noticing it.

So, the next step is to make sure it goes automatically into an investment account. My employer, Microsoft, has set up its payroll system for electronic direct deposit and I can allocate my paycheck among several accounts. To make sure the $74 really does get saved, I set up my electronic direct deposit to put the entire amount straight into an investing account. (If your employer doesn't offer you this alternative, you can set up an account with ShareBuilder.com that will take the money automatically out of your checking account each month.)