Wednesday, July 30, 2014

Relatively Painless Ways To Start Saving

Since the 1980s, the amount of money people have been saving has been dropping. The savings rate, which is defined as how much money a person saves divided by how much money they earn after taxes, was 3.8% in March, 2014. This means people are basically living paycheck to paycheck and any unexpected event, such as an accident or job loss, could result in major hardships, possibly even bankruptcy.

A common excuse for not saving is people often think they can't save any money. If I can barely make ends meet now, they reason, how can I afford to start saving money? The truth is, you probably are spending way more than you need to and have lots of room to cut back. Do you really need that $5 Starbucks coffee every morning? Do you need to go out to lunch every day? There are dozens of ways you can save a buck or two here and there and it all adds up.

When you want to get serious about saving, you need to do one thing consistently - pay yourself first. That means as soon as you get your paycheck, pay yourself first by transferring some of that money to a savings account. Better yet, set up your direct deposit to put some of your paycheck directly into a savings account. You'll never see it, so you won't spend it.

Building An Emergency Fund

A good starting point is to save 10% of your take home pay each paycheck. That may sound like a lot, but it's really not. Get into the habit of immediately saving 10% of your pay the day you are paid. Do that consistently and pretty soon, you'll find you don't miss that extra money because you will adjust your spending. After a couple of months at 10%, increase that amount. Back when I started this, I went from 10% to 12%. That didn't really cause any hardship to me. A few months later, I upped it to 15%. At that point, I started to notice a bit of pain, so that's where I stopped

This is a good way to build up an emergency fund. Conventional wisdom is you should have savings equivalent to 6 months of expenses, just in case you lose your job or some other financial catastrophe hits. I think that's a tad excessive. I prefer a somewhat lower figure - 6 months of mortgage or rent payments, plus money for groceries. But if you go with this lower figure, do this with the understanding that, if you lost your job, you are going to drastically reduce your expenses by immediately cutting out all your other non-essential purchases - eating out at restaurants, cable TV, etc. Also, if you are part of a two income family, you may be able to get by with less savings due to the fact that it's unlikely both wage earners would get laid off at the same time. (Exception: if you both work for the same company, you both might find yourselves out of a job if the company goes bankrupt or has layoffs.)

Building Retirement Savings

If you are trying to build up a retirement nest egg, there's an even more painless way to save and increase your savings on a regular basis. In fact, if you do this, you won't feel like you are missing any money at all.

First, if your employer offers a 401(k) or 403(b) account, contribute! Furthermore, contribute enough to get the full employer match, if one is offered. The employer match is free money and you should get as much of it as you can. Then, each time you get a raise, increase your contribution. For example, if I get a 3% raise, I increase my 401(k) contribution by 1%, effective the date my raise is effective. By doing this, I still see a 2% increase in my take home pay AND I still increase my retirement savings. It's a win-win!


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