Wednesday, January 03, 2007

How to Save Money

Whether you want to go on a vacation, buy a house, or enjoy a comfortable retirement, you’ve got to learn to save money. Unfortunately, many of us tend to spend whatever we earn or more. We know savings are important for unexpected emergencies or major life changes, but we just can’t seem to put some cash away for a rainy day. Want to stop living from paycheck to paycheck? Read on and start saving today.

Steps

  1. Don't buy things you do not need. Sure, it's easier said than done, but sometimes you might want to forgo that extra bottle of soda or bag of candy at the supermarket exit, or anything else that won't benefit you in the long run.
  2. Figure out what you need to save for and how much you need to save. For short-term goals, this is easy. If you want to buy a video game, find out how much it costs; if you want to buy a house, determine how much of a down payment you’ll need. For long-term goals, such as retirement, you’ll need to do a lot more planning (figuring out how much money you’ll need to live comfortably for 20 or 30 years after you stop working), and you’ll also need to figure out how investments will help you achieve your goals.
  3. Set savings goals. Once you determine how much you need to save, establish a timeframe (i.e. “I want to be able to buy a house two years from today.”) Set a particular date for accomplishing shorter-term goals, and make sure the goal is attainable within that time period. If it’s not attainable, you’ll just get discouraged.
  4. Figure out how much you’ll have to save per week, per month, or per paycheck to attain each of your savings goals. Take each thing you want to save for and figure out how much you need to start saving now. For most savings goals, it’s best to save the same amount each period. For example, if you want to put a $20,000 down payment on a home in 36 months (three years), you’ll need to save about $550 per month every month.
  5. Add together the installment amounts (monthly, weekly, or per paycheck) for all your savings goals. Can you afford to save this total each period? If so, great; if not, proceed to the next step.
  6. Pay yourself first. Savings should be your priority, so don’t just say that you’ll save whatever’s left over at the end of the month. Deposit savings into an account (or your piggybank) as soon as you get paid.
  7. Keep a record of your expenses. Write down everything you spend your money on for a couple weeks or a month. Be as detailed as possible, and try not to leave out small purchases.
  8. See where you can trim your expenses. You’ll probably be surprised when you look back at your record of expenses: $300 on ice cream, $100 on parking tickets? You’ll likely see some obvious cuts you can make. Depending on how much you need to save, however, you may need to make some difficult decisions. Think about your priorities, and make cuts you can live with.
  9. Reassess your savings goals. If there’s absolutely no way you can fit all your savings goals into your budget, take a look at what you’re saving for and cut the less important things or adjust the timeframe. Maybe you need to put off buying a new car for another year, or maybe you don’t really need a big-screen TV that badly.
  10. Make a budget. Once you’ve managed to balance your earnings with your savings goals and spending, write down a budget so you’ll know each month or each paycheck how much you can spend on any given thing or category of things. Try to leave a little room for minor unexpected expenses.
  11. Stick to your budget. A budget won’t do you any good if you don’t follow it religiously. Build some self-discipline, and remember why you’re on a budget in the first place.
  12. Open an interest-bearing savings account. It’s a lot easier to keep track of your savings if you have them separate from your spending money. You can also usually get better interest on savings accounts than on checking accounts (if you get interest on your checking account at all). Consider higher-interest options such as CDs or money-market accounts for longer savings goals. You can also open an online savings account with one of the companies that offer them. Look around for the best savings interest rate and try to find one that adjusts its rate as the federal interest rate changes. You can then set up an automatic transfer from your checking account to your high interest savings account. Many employers allow you to deduct savings from your paycheck. The money is directly deposited in your savings account so you never even see it on your paycheck. You can also have investments for retirement taken directly out of your pay, and the taxes may be deferred with this option. If you typicaly keep a large balance in your checking account, consider moving most of that money into a linked savings account. Keep the money in savings until it is time to pay bills, then transfer enough from savings into checking to cover your bills. Make sure you check with your bank to see what the minimum balance requirements are for your checking account so you don't get hit with additional fees.
  13. Don't use your credit cards. This is one of the most effective ways to reduce spending. Use cash for as many purchases as possible - you'll be more conscious of what you are spending your money on.
  14. Kill your debt. Simply calculating how much you spend each month on your debts will illustrate that eliminating debt is the fastest way to free up money. Once the money is freed from debt payment, it can be easily re-purposed to savings.


Tips

  • If your savings timeframe is very long, such as for retirement, you may want to structure your monthly savings so that they grow larger later in life when you will (hopefully) have more income coming in. On the other hand, money invested while you are young will have more time to grow. Start when you are in your teens!
  • Consider setting up an automatic weekly or monthly transfer from your checking account to your savings account. With many banks, this can be accomplished online.
  • If unexpected expenses cause you to deviate from your budget from time to time, cut unnecessary expenses before you cut money from your savings goals. Other than the bare necessities, your savings goals should be your top priority.
  • In this day and age, many of us have cars, so saving money on gas can contribute to your effort considerably. Consider getting rid of the car altogether if you can. Another option is to avoid maintaining multiple cars. Failing that, drive less and shop around for insurance even before you buy a car. See the related wikiHows for more information.
  • If unexpected circumstances render you unable to meet your savings goals, reassess them and figure out which ones you can delay or cut out. Get back on your program as soon as you can.
  • For very important or very large savings goals (such as a down payment on a house or saving for your kids’ college tuition), consider opening up a separate account. You’ll be able to keep better track of that particular goal, and you’ll be less tempted to dip into it.
  • If you receive unexpected cash, put all or most of it into your savings, but continue to set aside your regularly scheduled amount as well. You’ll simply reach your savings goals sooner.
  • As you satisfy the payment of a car loan, or your mortgage, you will have extra money. Set aside that money into savings. This way, the money you used to pay to somebody else now goes to you.
  • Use a piggy bank or jar for your coins. Coins and change may look insignificant but when accumulated over time they can help you save. Some banks now offer free coin counting machines. When you redeem your coins, ask to be paid by check so you won't be tempted to spend your newfound cash.
  • Don't save money solely for the purpose of spending. Setting some amount aside for emergencies can keep you out of a lot of trouble. Decide on some number of months' worth of salary as a cushion, and make a point to replace this stash anytime you must use it.
  • Interest on debts, especially high interest rates on credit cards, is a huge, unnecessary expense. If you are in debt, pay off your loans right away to get out from under that debt as fast as you can.
  • One option to get started saving is to find out what your take-home pay per hour is (net pay divided by hours worked) and save the "change" from each hour. For example, if you worked 25 hours and your check is $164, you would be making $6.56 "take-home" per hour. Save $14 that paycheck, and you have saved all the "change" per hour. If your hourly take home pay is an even number somehow (like $6) then just save $1 or 75 cents per hour.


Warnings

  • Never loan cash to others that you cannot afford to lose.
  • Never borrow money that you cannot repay.
  • Do not go out "window shopping" with any money on you. You will only be tempted to spend money you cannot afford to lose. Shop instead, only to a predetermined shopping list.
  • Be sure to keep track of automatic deductions from your paycheck and any automatic transfers you set up. Sometimes mistakes happen, and if you’re not paying attention, you might not get all your money.


en

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