People think that there is some magic bullet to start saving but I’m here to let you know that there is no magic bullet when it comes to saving. Saving money is not easy, but it is essential to achieving financial well-being and securing your future. Honestly it’s about setting realistic goals, prioritizing how you’ll manage your money and sticking with it. Below are some ideas to get you started with saving without feeling pressured. It’s important to understand the difference between Gross Income vs. Net Income, creating goals: short and long term goals, creating a simple budget, saving (ER fund, 401K, IRA, etc), paying off debt, and enjoying life.
1. Gross Income vs. Net Income: People really need to understand the difference between Gross Income vs. Net Income before they start creating a budget, saving and paying off debt. Gross income is your salary, the total dollar amount your employer agrees to pay you over a given time period. Net income is what you take home: the amount you earn after your employer makes deductions for taxes, benefits, etc. People make a huge mistake of budgeting from their gross income when they should be budgeting off of the net income.
2. Create Saving Goals:This is important to understand why and what you are saving for and how much you will need to achieve your goals. Creating short and long-term goals will get you pumped and motivated about saving. Short-term goals (1-5 years) may be: family vacation, buying a new car, buying a video game system, paying off small debt amounts. Long-term goals (5 years-longer) are saving for retirement, buying a house, having a baby, paying off large debt amounts, becoming financially independent.
Your circumstances do not matter. It is important to realize your goals and start saving for those goals. Once your goals are identified you can begin making your dreams a reality. When your goals are clearly defined on paper you are more likely to make those goals come true. Remember to start small and build up from there. With goals outlined and attainable it will make it easier than you thought to save and achieve those goals.
3. Simple Budget: It is crucial to create a simple budget to track your income and expenses. My budget consist of no more than two columns in an excel spreadsheet:
Your budget may change throughout the year due to circumstances outside of your control.. I really enjoyed the following website about simple budgets:http://frugalandthriving.com.au/2009/creating_a_simple_budget/.
4. Make saving automatic and effortless: You should start out by saving a minimum of 5% of your income and make it automatic; the more you can save the better. My savings are automatically taken from my paycheck so I don’t have to think about it. Paying myself before I pay anyone else is an important concept to understand. The benefit of making your savings automatic is that you don’t see it; therefore you don’t miss it. I have been using IngDirect to do this since 2002. Remember it’s not how much you save. It can be $5, $10 or $15 every time you get paid. It’s about making it automatic and effortless so it becomes a habit.
- Emergency fund: This is where you should first start. I recommend saving enough money to cover your basic living expenses for three to six months. The money in your emergency fund should be kept in an easily accessible savings or money market account so it is easily accessible if an emergency was to occur. It is important to only use the money set aside in your emergency fund in the event of an emergency, such as your car breaking down, receiving unexpected medical bills, losing your job etc.
- 40lK or 403b Plan: If your employer offers a retirement savings plan, such as a 401(k) or 403b plan, sign up and contribute all you can. Your taxes will be lower, your company may kick in more, and automatic deductions make it easy. Over time, compound interest and tax deferrals make a big difference in the amount you will accumulate. Find out about your plan. For example, how much would you need to contribute to get the full employer contribution and how long would you need to stay in the plan to get that money.
- Roth/Traditional IRA: You can put up to $5,000 a year into an Individual Retirement Account (IRA) and you are allowed to contribute more if you are 50 or older. IRAs provide tax advantages. When you open an IRA there are two options: a traditional IRA or a Roth IRA (you should talk to your financial advisor or research which one is best for you based on your income). The tax treatment of your contributions and withdrawals will depend on the IRA you select. IRAs can provide an easy way to save, you can set it up so that it can be automatically deducted from your checking/savings account and deposited into your IRA.
- Investing: If you are thinking about investing I believe you need to think about how to buy rather than what to buy. You should understand that investing is risky and you can’t eliminate that risk but you can become an educated investor who makes informed decisions. Being educated about the market allows you a margin of safety and a cushion in case events go against you. Once you start thinking about investing in stocks, bond mutual funds, your first steps should be to talk to a financial advisor. You need to understand what type of investor you are and what risk you are willing to take.
5. Paying off Debt: Paying off debt is definitely going to mean making sacrifices and going without sometimes. It’s the sacrifice you make to live debt free. As a debt-free individual I can’t tell you how much pleasure I get from having no consumer credit card debt or student loan debt. It creates so much happiness and freedoms that you don’t get to experience with having credit card debt. It is important to pay more than the minimum payment each month. Paying the minimum of the outstanding balance only prolongs the torture of paying the debt off. The longer you keep your credit card debt the more you become best friends with the banks that you owe and of course the more you will owe them. The system that I used to eliminate my debt was simple I used the snowball elimination:
- I listed my debts from lowest balance to highest balance and I created a timeline of when I wanted to have the debt paid off;
- I called my credit card companies on a monthly basis to have them lower my interest rate (most of my cards had an interest rate of 6.99% or lower);
- I designate a certain amount of money to pay toward debts each month;
- I paid the minimum payment on all debts except for the one with the lowest balance;
- I threw every other penny I possibly could at the debt with the lowest balance;
- When I eliminated that debt, I did not alter the monthly amount used to pay debts, but what I did was threw all I could at the debt with the next-lowest balance;
- This method allowed me to become DEBT-FREE.
*While trying to become debt-free remember to try and live as frugal as possible AND to increase your income (yard sales, selling items on craigslist, get a weekend or second job, babysit, etc), if possible. The combination of living frugal and increasing your income will make it easier to pay off your debt quicker. Also do not use your credit cards while paying them off (don’t close your accounts just don’t use them).
6. Living Life: It is important to remember to live your life while putting all of these steps into place. It is a lot to think about, but you have to make sacrifices in order to become independent and wealthy. You also do not need to sacrifice so much that you are taking the happiness out of your life. The point of all this to make your life easier now and in the future– so just remember to make sure to enjoy putting these steps into place so you can enjoy life in the future.