> How To Save Money: The Only Way That Works
How To Save Money: The Only Way That Works
How To Save Money Theory
I am forty years old now and when I look back at my life I wish I knew how to save money when I was in my early twenties. The basic principle is that the amount of money coming in must be bigger than the amount of money going out. Easy, right? Easy in theory, but not in practice, unless you know and practice this one simple rule: put savings aside first – before anything else.
In this post I want to help you get started saving money by explaining how it worked for our family to switch to a saving way of life. I have always hated debt and managed to never get myself into deep trouble. I’ll write a post later on how to get out of debt in the fastest way possible.
Saving money is a skill. This and prudent money management are not taught in schools and your parents must teach you how to do it throughout your childhood and early teen years with real life examples. If they don’t, then by the time you’re out of the family nest, it’s too late and you’ll have to learn via the school of hard knocks.
Expenses Fill The Available Budget
There is a saying I heard somewhere: “expenses fill the available budget” - and it’s true. A lot of people think that they’ll start saving when they start making more money. If you make $2,ooo a month right now and if you think: “When I make $4,000, I will save $2,000″ - you are self-delusional because when you make more you will spend more. You will try to live up to your new social status by buying more expensive things and services.
It was hard for me and my wife psychologically to start saving at the beginning. We had to change our lifestyle and certain habits to be able to free up money for saving.
At the beginning we decided to save 20% of what we make and the first month we put the 20% aside first but we kept it at home, so at the end of the month, when we ran out of money prematurely, we spent it. We had no discipline and no plan.
Second month we opened a joint savings bank account that had no online access, no debit card and we had a special rule set up with the bank that we could only make withdrawals when both of us were present at the teller. This made it so hard for us to withdraw that money because of our busy schedules – getting together to the bank at the same time was a real hassle. Since then we stopped doing it, but for the first six months this was the key that helped us to stick to our plan. Now we save 50% of our income! And you can too – read on.
A few month later, after we accumulated some money, we came to the conclusion that we had to have a plan. By plan I mean you have to decide what are you saving for and how much percentage-wise. After a few months of changes and tweaks we came up with this structure:
Income – 100%
Expenses – total 50%:
30% – Living Expenses (house, food, gas, internet, phones, electricity, TV, etc.) – This used to be 55% of our income at the beginning! We got rid of a few subscriptions, canceled others and we are always on lookout to spot where we can reduce our living expenses even more. I will be explaining in detail in future posts on how to reduce these expenses without sacrificing quality.
5% – Monthly ”Unexpected” Fund (this is the money we keep handy for things like car repairs, medical bills, etc) – We gradually accumulated it to a $2,000, and then everything over that goes to the investment fund! If an expense occurs, like last month we had to pay $240 to replace the window motor in the car, then we fill it up to $2,000 again.
10% – Entertainment/Shopping Money (movies, dining out, weekend trips, “oh, my God, I love these shoes” compulsive spending money, etc) - We run out of this money, we stay and play at home or visit friends! Included in this are our individual adult “allowance” money – for small indulgences. If we don’t spend it all – we carry it over to the next month. A single friend of mine pointed out that this percentage is very low as singles go out a lot more. Well, this is just an example. You should set the percentages the way it works for you!
5% – Planned Shopping (items we need from time to time: clothing, household appliances, etc.)
Savings – total 50%:
20% – Retirement Fund (this is money that we don’t touch until we decide to retire and this money cannot be used for risky investments) – You max your IRA account and if you have extra, save it in liquid money investments like bank CDs, short term bonds, etc. These don’t pay much interest but are safe and liquid.
20% – Investment Fund (stocks, real estate, etc.) More on this later…
5% – Education Fund (our son is only one year old and we decided when he was born that we will start saving for his college now)
5% – Travel Fund (when vacation time comes, we see how much we saved and where we can go for that money) – If we have a special place we want to go to and we don’t have enough money for that, we postpone that till the next year and go somewhere on the cheap instead spending a maximum of 50% of the travel funds that we have saved.
Emergency Money Fund
Before we started to put money towards any of our savings plans, we didn’t have the emergency money fund and had to save for it first. This is the fund that you must have available before you start saving for anything else. The bare minimum is to have six months worth of living expenses saved in case you lose your job or are unable to work due to illness or any other reasons. It is recommended by most experts to have one year minimum worth of living expenses saved.
We have six months worth of living expenses in our emergency money fund. We keep half of this money in dollars at home and the other half in one to three months term bank CDs which earn little but this money is easily available on demand. If, for example, living expenses are $2,ooo a month, then six months emergency fund is $12,000 and a one year fund is $24,000.
Compulsive Shopping And Credit Cards
The way you approach buying things changes when you have a budget. Below are some helpful examples on how to deal with credit cards, compulsive shopping and other dangers hidden beneath the surface that can sabotage your savings.
Years ago, I read an article about a research study where it was proven that we use 10 percent of the things we buy 90 percent of the time! I tried to find this article to post a link to show you the evidence here, but I googled in vain, you will have to take my word on it.
This means that 90 percent of the things we buy, we only use 10 percent of the time. Some of those things we never use after the initial excitement wears off! Have you ever dug up something and wondered why the heck you bought it in the first place? I recently took out of the closet a back massage machine, the one that you clip on the back of the chair. It cost a hundred bucks. It never properly fit on the very comfy chair that I have and it ended up in the closet. Now it is on its way to a new lucky owner who won it on eBay for $30.
There is one very helpful trick a friend of mine told me that helps him immensely to curb compulsive spending - walk away from any unplanned purchase of over $50 for 24 hours. Make it a rule. If after 24 hours you still think that you must have that thing and you will put it to good use, then by all means you go and get it. You will be surprised that quite often you will realize that this is a waste of money or you can live happily without it or there are cheaper alternatives. I am not proposing here a completely minimalistic approach to buying things, but taking your time and making rational decisions rather than getting tricked by clever advertising that pushes us to buy right at that moment.
One very important point is the use of credit cards. If you have the discipline to use them up to the available budget, then there are no objections. Get on a nice cash rebate, travel miles or any other plan and earn some extra cash. We had to lock them up at the beginning. Now we use them on a 1% cash back reward program. We prepay them. We deposit up front our monthly expenses (less house payments) and entertainment money and we check every day the available balance and once it goes to zero, we leave them at home! This requires discipline. If you don’t have the discipline - don’t carry credit cards with you – lock them up. Some might argue that you need to have the credit card with you all the time for emergencies. We carry $300 in cash from our monthly “unexpected” fund for that. If an emergency bigger than the amount of money in your monthly “unexpected” fund happens, you can always go and get them! These big emergencies are very rare.
I hope our experiences will help you. I would like to hear your stories please or if you have any tips on how to improve one’s saving habits.