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Saving Money the Right Way

(Before reading the rest of this article, you may want read the Budgeting and Financial Goals articles. Many of the principles discussed in those articles will be mentioned in this one as well.)

Saving money…we all want to do it. Some people actually are successful at it. Many think that they can do it are fooled into thinking they are successful at it but really aren't. And then there are those that just can't save money for one reason or another. So what happens? Why is it so hard to save money?

Many times there is something that is associated with the economy that gets in the way of all the efforts put forth to save money the right way. However, most of the time it is possible to save some money (even though it may be a few pennies) with some careful planning, a little bit of sacrifice, and a lot of financial control.

How to Save Money

Saving money is one of those things we try to do because it sounds easy and many times fail at because it isn't. Many times people think of saving money as spending less money. They don't think of what it is to actually set the money aside to be saved. Many times is it a conscious effort to spend less, which in reality turns out to be a "spend less in this area and end of spending more in this area" type of situation.

Saving money is a process that starts with a plan. The plan needs to include goals, it needs to include a budget, and most of all it needs you to have the right attitude. Following are some guidelines to help you save money the right way.

Step 1: Set Savings Goals

Setting financial goals will help you put yourself in a better financial position down the road. Using a savings goal is just one of the means to help you get there. Savings goals need to be just as detailed as financial goals. They need to be broken down into short-term and long-term lists. They need to be specific. Along with that, you need to know really what you want to achieve, because if you don't really want it, it shouldn't be a savings goal. Whether it is a new computer game, a house, or a good retirement, a savings goal will help you achieve what you aim for.

One thing that you will need to consider as you set your savings goals is that no matter how much you want to save, it may not be possible at the present time. That is the first reason for setting goals. If you are in a situation where your budget doesn't allow any leeway at all thus preventing you from being able to save money, then you need to set goals to eliminate debt first. Eliminating debt frees up money…money that you may be able to save away.

Step 2: Establish a Timeframe

It doesn't matter what type of goal you are setting in life, just as long as you set a timeframe. A goal without a timeframe is a dream. Do you really want to turn that "I want to own a home on Cape Cod" dream into reality or just continue dreaming about it? Well, that home won't be cheap so if you really want it, stop dreaming and start working.

All savings goals need to have a start time and an end time. Make sure that the timeframe is realistic to the goal. Don't give too much time for a short-range goal and don't give too little time for certain long-range goals. If the time frame is too short and causes the goal to become unattainable, you may become discouraged. Also, be willing to be flexible on some goals. Flexibility could prove to be the thing that is most needed to achieve the goal.

Step 3: Figure Your Weekly (Monthly, Yearly, etc.) Savings Amounts

As you look at the items that you are saving for, you need to break down the calculations how much you should be saving now. There are many online savings calculators that you can use to help you figure this out. When you are set on an amount, it is wise to make that amount be the same for each period (week, month, pay period, etc.). When you see how much you need to save each period in order to achieve the goal, you may realize that you need to adjust the time period a little (because you can't adjust the amount you are paid nearly as easily).

Step 4: Keep a Record of Your Expenses

What you save is in essence a remainder of the income you received but didn't end up spending. You need to keep a record of those expenses so that you can know exactly how much you truly can save. Think about it, if you are trying to save $100 but aren't tracking your expenses, you may end up spending the money that you are trying to save. By tracking your expenses, you can see where your money is going and have a reminder to stay within the budget so that you can reach that $100 sooner rather than later.

To help in the tracking of your expenses, you may want to get a small notebook to keep with you at all times. You would then be able to write down each expense as it happened. Then, on a regular schedule (such as weekly) you should sit down with those notebooks and receipts and total it all up. All of this can also be done using a Palm Pilot, Franklin Planner, Blackberry, or any other device that allows you to make either written or electronic record. Software programs such as Excel and Lotus 123 can be useful in recording your expenses as well because of the ability to track your expenses by category and create totals and sub-totals.

If you want to use something like this, here is a word of caution: If you run out and buy electronic equipment and/or software to help you track your money in an effort to save money, you will put yourself in a hole that you will need to dig out from. Spending money to track expenses so that you can save money is a bit counter-productive.

Step 5: Trim Your Expenses

So a month has gone by and you have recorded all of your expenses in your new little notebook. You total up all of the expenses and realize that the expenses equal, or maybe even surpass, your income. Not a whole lot of saving is taking place in this situation. So now what?!

If your expenses are more than your income, I would like to refer you to the article on Budgeting. You have more to learn there before you start trying to save. But in the event that you have a budget that you just recently started, you are given a reprieve right now based on the fact that you are a beginner. We can handle that.

Look at the expenses that you incurred during the last month. Are any of them variable expenses? If so, you should already know where you should begin as you look for things to cut out of your spending habits. That could help create excess money that turns into savings. If cutting out some of the variable expenses is not enough, you should look at what you can do with some of your fixed expenses as well. For example, you could consolidate your debts, find alternative and cheaper ways of transportation, or if you rent your house or apartment, you may need to consider moving to a place that is cheaper. Whatever it is that you decide to do to help save money, make sure that you don't slip up and spend unwisely. Otherwise, you may never reach your goal.

Step 6: Reassess Your Savings Goals

As with any goal, take the time to reassess what you are doing. Are the goals as realistic now that you have been working on them? If not, then erase them from your goal list. You shouldn't be working toward something that you can't have. If you just can't rearrange the budget to make saving work, maybe saving money isn't what you should be working on. You should first get yourself out of debt. Don't force yourself into a large credit-card balance just because you want to have cash left over to claim as savings.

Step 7: Make a Budget

In many opinions, this should have been the first step. But in this article it isn't. Why? Well, simply put, it is because there are principles to planning for savings that you needed to learn. Besides, if you have already read the article on Budgeting, I would think that you have also started to make a budget and know what to do in this step.

If you don't have a budget created already, make one. Part of your budget should be a portion to pay yourself for savings. Making your savings a part of the budget will actually help you to be successful in that area. If you can, pay yourself 10% of your income. If you can't, budget in what you can. By making a savings amount part of your budget, you can figure to put the money away in a savings account at the time that you are paid or are paying your bills. If you can budget it, you most likely won't spend it somewhere else.

Step 8: Stop Using Credit Cards

Yep, you read it correctly. Stop using your credit cards. Why? Well, the first reason is because credit cards create an illusion that you can spend money now and pay it off later. Okay, so that is how it works but you don't realize the danger if that is how you really think. Credit is designed to let you use money you don't have today and pay it back later. Unfortunately when you pay it back later, you will be paying back more than you spend because of a nifty little thing called interest and its good friend called finance charges.

So let's assume that you pay off your credit card each month so that you don't get those finance charges or interest charges. It is still a good idea to not use your credit card. The second reason why you shouldn't use them is because your budget will most likely NOT have a category for paying the credit card bill. That means that you will not have any money budgeted to pay for the expenses that you incur using the card. That in turn means that when you get done paying all of your bills, including the one for the credit card, money that you had hoped to put away as savings will not be there for you. This doesn't help in your quest to grow your nest egg.

This doesn't mean that you need to get rid of your credit cards. They are great to have in an emergency where you don't have cash or enough of it if you do. You may also have a card that you want to use because of the added incentives such as a percentage of cash back, or points that can be used for airline tickets and hotel rooms. These are great benefits, but you better be religious about paying them off each month so that you don't get charged those fees talked about. If you are going to use a credit card so that you can get the point/miles/cash back benefits, it would be a good practice for you to make the purchase on the credit card and deduct the expense from the expense category it falls under. You could even physically withdraw the money from your bank account and set it aside to pay the credit card bill when it comes. That way you don't have to come up with any additional money aside from what you budgeted.

Step 9: Open an Interest-bearing Savings Account

When you are trying to save money, the wallet is the last place you want to keep it. You are most likely going to spend it on something that will only bring you temporary satisfaction. Placing it in a jar on the shelf or in an envelope under the mattress is a little better, but why not choose the option that is best for you?

By opening an interest-bearing savings account at your bank, not only are you placing your money in a very secure (and very big) safe, but you are getting it out of your possession and greatly reducing the risk of spending it. Also, if the account is interest-bearing the bank will pay you money back based on the balance that you maintain in the account. As the balance in the account grows because of your savings, the bank will pay you a higher percentage.

Think of it, based on simple math, if you have a 5% interest-bearing account, then for every hundred dollars you keep in your account, the bank pays you an additional $5. This is just an example and may not be exactly how the terms of your account will work, but you get the idea. You are getting free money with the interest that is earned off of your account balance. This additional money will just help you achieve your savings goal sooner than later.

The other reason why you should keep the money you save in a savings account at the bank is because they will insure your money. If a burglar broke into your house and stole the money jar that you had your savings in, you would probably never see that money again. Same with if you lost your purse. But at a bank, your money is federally insured (usually up to $100,000 per account).

You should also consider higher-interest options such as CDs (Certificate of Deposit…not compact disc) and money-market accounts. These are great for the long-term savings goals because they receive a higher interest rate and have penalties assigned to detract you from withdrawing your money.

Step 10: Know Where Your Money Is

Keep track of your money wherever it may be; savings accounts, checking accounts, wallets, and jars. By knowing where your money is, you will know how much you have and will be less likely to spend it all. This is good to know because if you don't track it and end up overdrawing from your checking account, you will incur overdraft fees. Those fees will cut into the money you are hoping to set aside in savings.

Step 11: Pay Yourself First

This is a very important step and is usually the hardest to follow. If savings is your priority, budget some money to go into the savings account when you get your paycheck. This is the easiest way of setting aside your savings money. It is also the hardest to come to terms with because your finances may be so tight that you don't feel you can afford money for savings.

If you are able to pay yourself, 10% is a sum that you should aim to set aside. Why 10%? Well, probably because it is an easy amount to calculate (take the sum of your paycheck and move the decimal point to the left one place). However it is what many budgeting websites recommend so we will go with it in this article too. However, those same budgeting websites will also tell you that you need to make sure that all your fixed expenses are paid before you set aside money for savings. The "pay yourself first" rule really only applies when you know that you will have money to do so. Don't pay yourself some savings money when you know that you will just end up having to use the credit card to cover other bills.

Other Helpful Hints

By following these steps, you should be able to work on a regular basis to make your savings grow. Even if you can only set aside $10 per month, over time – and with interest earned in a bank savings account – you will be able to reach the goal that you are aiming for. It will get easier as you go along, and hopefully you will be able to work your budget in such a way that you are able to increase the amount you put into savings as time goes on.

If you don't feel that you can set money aside for savings right now, don't feel guilty about it. You need to make sure that your fixed expenses are taken care of and that even variable expenses that are mandatory are covered. Just be sure to start saving when you feel comfortable doing so. In the meantime, here are a couple of other hints on things you can do to help work into a regular savings habit.

  • Have someone that knows you (and your wardrobe) really well go shopping with you. They will help you to not buy any clothing that you might already have or don't need. Don't take friends along if they own more the 50 pairs of shoes though because they will talk you into making unnecessary purchases.
  • If you receive unexpected cash (bonus money from work, inheritance from your favorite uncle, etc.) put most or all of it into savings. Continue to set aside your regularly budgeted amount as well. The unexpected money will just help you achieve those goals quicker.
  • Make purchases with paper cash, not exact change. Take the change you get back and put it into a savings jar. When the jar is full, take it to the bank and deposit it in your savings account. You will be surprised how much money you have with a quart jar or coffee can full of coins.
  • Adopt this mindset: The more money you store away in a bank savings account, the less you have to work in your lifetime. It is the magic of interest that will help achieve those goals sooner than later.