We all know how hard it is to save money. We also know that it can be done, no matter how much money we make. It may take every ounce of discipline you have to force your savings. You may even have to sacrifice things you have become accustomed to having. Here are 5 effective ways to make yourself save that-if done properly, will create more savings that you would not have ever thought possible.
Pay Yourself First-
Every paycheck, you probably gather your bills and figure out how much money goes toward each of them. This often leaves you little to nothing left over. Are you working for people you owe, or are you working for your future? If you are not paying yourself, you are cheating yourself. If you have direct deposit, and your income is relatively predictable, paying yourself first can be very easy. Where to stash the money that you are paying yourself with becomes another issue…read on for ideas for this money. For a wealth of information about paying yourself first, read The Automatic Millionaire: A Powerful One-Step Plan to Live and Finish Rich
by David Bach. Read my review HERE.
Get an online account that you will “forget” about–
I have mentioned online savings accounts before, but have not detailed how to fund these accounts. This is the first stop for your pay yourself first funds. I recommend that you allocate a percentage of your take-home pay be deposited to an institution separate from where your primary checking account is held. This makes you less likely to be tempted to dip into your savings for “wants”. Online accounts are very easy to set up and fund, but if you are stuck in a hard place, you will usually have to wait 2 business days to have your money transferred. Although you may think, “I can not afford to lose anything from my income”, chances are that if you start an outside savings account, you will adjust quickly to the money that is no longer right at your fingertips. More importantly, you are beginning habits that will benefit you greatly in the long run.
Direct deposit is one of the greatest tools offered to us. We can put away money, allocate it to different sources, and easily contribute to savings without conscience thought. Full automation of our financial structure requires quite a bit of work, and I am still working on mine, but what I have done thus far could not be more beneficial. Although I do not make much money, I still have automated MOST of my savings. Here’s how it looks:
Use CD’s, IRA’s and 401k Plans-As you can see above, I take 10% of my pre-taxed wages and put it into my 401k (even though my employer only matches 5 percent). To me, this is only a part of my “pay yourself first” money. I then take approximately 10% of my net (post-tax) pay and have it deposited into my online savings account. Although it appears to be 20% right off the top, it is actually less than that. Since the 401k funds are not taxed, I am only giving about 7% (not 10%) and not paying the government “their share” of that 3% in my wages. Saving without paying taxes is a great benefit that far too few people take advantage of.
IRA’s can play a similar role to 401k’s, but your employer will not set it up or make the contributions automatic for you. For more IRA information, read my post from last week HERE.
CD’s are much different than IRA’s and 401k plans, but are still a good way to lock up savings temporarily, and get a better rate of return than your regular savings account. CD’s or Certificates of Deposit are timed deposits offered by banks and credit unions at a guaranteed interest rate. When you open a CD, you are essentially loaning the bank your money for a pre-determined length of time. In return, the institution offers you a set rate of return. (For current CD rates and terms, check out BANKRATE).
Get rid of debt-
You can not build savings while paying too much in interest. If you have credit cards with a balance, your FIRST priority should be paying them off. That does not mean sacrificing savings entirely, but it does mean pumping everything you can into your balances. Once you have a solid emergency fund established, (see: How Much Money Should I Save?) attack your cards. Once they are paid, attack your car payment. Interest payments could be crippling you without your knowledge. You could easily be paying more in interest than you are saving, so gather all of your bills and calculate how much you are paying in debt. Devise a plan to attack it, and once it is gone, you will have tons of extra money to save or invest every month.