In my time as a financial planner, I have learned that there are many reasons why people don’t save money. Some are good reasons, and some aren’t. As for the reasons themselves, well, they range in variety.
Many people, simply put, live paycheck-to-paycheck. A paycheck comes in, and the bills get paid, leaving little left over.
Some families who live paycheck-to-paycheck are forced into this lifestyle. Each pay period, these families get by with just the bare essentials.
For others, living paycheck-to-paycheck is a –choice—a choice they make in response to what I refer to as “lifestyle creep.” This is more commonly referred to as “keeping up with the Joneses.” A bigger house, a nicer car, a second home, a country club membership, more vacations, and/or a fashion obsession are all luxury expenses that the high-wage, paycheck-to-paycheck lifestyle creepers choose to buy (in my opinion, this type of family needs its own acronym, like DINKS).
Other times, clients choose to save, but they simply aren’t saving enough. They have either failed to adequately calculate how much they must save or they are underestimating what that target amount happens to be. Either way, they simply aren’t saving enough.
Fortunately, there is some good news. Both sides can take comfort in knowing that they can become the saver they need to be. Today’s post is intended to explore several strategies you can use to save a few bucks!
Saving Strategy 1 – Save Strategically
Have you ever considered how you save money?
Are you actively aware of how much you’re putting away in your 401(k) each year?
How much money is saved in your emergency fund and your savings account each month?
If you’re like most people, you don’t know the answers to these questions. If you are saving, it’s likely that the saving is the byproduct of a conscious unawareness. Simply put, you’re making more than you spend.
One strategy to consider is paying more attention!
Be sure that you know the answers to these key questions I mentioned above. Be aware of how much you are deferring into your employer-sponsored retirement plan at work. Is it 5% or 10%? Translate this percentage into a dollar figure, which often makes it easier to understand.
In addition, know how much you are saving in your personal bank and investment accounts. Try to establish a systematic plan. Each month, you will direct “X” amount of money from your checking account into your savings account. Once you have a substantial amount of savings, you could establish an investment account and do the same thing!
How much should you be saving in total? That depends on a number of factors, including your age, your goals, and how much you already have saved. However, one rule of thumb suggests that you may want to target 10-15% of your income – at least!
Saving Strategy 2 – Free Up Cash Flow
“I don’t have any extra money!” “All my income goes to my current bills!” “I can’t “find” money to save!”
I’ve heard these statements many times, and sometimes, they are a genuine response to someone living paycheck-to-paycheck. However, at other times, the budget crunch is because of a spending addiction or an avoidable luxury item. Either way, there are several strategies that may help free up more cash flow—cash flow that you will hopefully plan to save!
Refinance Your Mortgage
Interest rates are at historical lows. If you haven’t already looked at the possibility of refinancing your mortgage, you may want to. Refinancing a mortgage isn’t for everyone and it isn’t the answer for every cash flow issue, but it can be a viable strategy for freeing up cash flow that can be redirected elsewhere into savings.
The key is to be sure that you save the freed up cash flow – don’t just see a bigger figure in your account and go on a shopping spree!
For example, if you can reduce your mortgage from $2,400 to $2,000, you should save this money. If you find yourself spending your newfound cash flow, you may be setting yourself up for more issues in the future.
Setting up a monthly draft from your bank account is a good way to ensure that you save each month.
Refresh Your Tax Withholding
Another strategy to increase cash flow can be to reset your tax withholding. Did you get a refund last year? Did you get a refund for the several years before that?
In effect, when you get a refund, it means that you gave the US government your money to hold and use as they see fit throughout the year. Do you have any idea how much interest the government paid you on the money that they held for you?
You got it – ZERO!
Instead of giving the government an interest-free loan, consider changing your employer withholding. By doing so, you can reduce the amount of taxes that are withheld. By doing so, you will receive more in your paycheck each month. All else being equal, this will drive your tax refund down.
As mentioned above, the key is to force yourself into saving the extra money in your paycheck. This isn’t a raise and it isn’t a reason to go buy a nicer car… It’s a reason to save!
Pay Down your Bad Debt
Paying off credit cards is something I encourage clients to do whenever possible. Credit cards charge high interest rates and can seriously slow down cash flow. Simply put, credit card balances represent everything you couldn’t afford to buy, but bought anyway!
Once you pay off your credit cards (often starting with the highest interest rate first, while still making minimum payments on all of them), force yourself to save the money you were paying to the credit card bill.
Paying off a credit card shouldn’t be rewarded with a financial cheat day.
Paying off a credit card should be a sign that you are capable and ready to be financially responsible. The responsible next step could be to redirect that money somewhere that benefits you in the long run.
Force yourself to continue making that payment, but instead of paying it to the credit card company, pay it to yourself. Pay it to yourself with an increased deferral on your 401(k), into an investment account, or into your savings account. Regardless of where you save it, save it somewhere!
Savings Strategy 3 – Take Advantage of Windfalls (Sudden Money)
With great financial windfalls comes great responsibility. Sometimes, a financial windfall arises from positive life events, such as a year-end bonus, a tax refund, stock options, or for the lucky few, a winning lottery ticket. For others, financial windfalls are associated with less positive life events, such as death or divorce.
Whatever the reason, I encourage you treat this money as if it had been yours the whole time. It’s easy to blow sudden money and chalk it up to, “Well, it wasn’t really mine anyway!” or “I never had it before.”
Here’s what you need to know… IT IS YOURS and YOU DO HAVE IT NOW!
Don’t get sucked into the emotional spending trap that affects so many people who experience these sudden influxes of cash. A new home, a new car, or a vacation may seem wildly attractive, but all too often, I see recipients of sudden money blow it as quickly as they get their hands on it.
For small windfalls, use the money wisely and pay down debt or increase your emergency fund. If those boxes are checked, consider deferring money into a retirement or college savings account.
For large windfalls, the opportunities are obviously enhanced. Instead of buying bigger, nicer, more expensive things or giving and gifting the money away, take some time to let your emotions settle before jumping into major financial (and life) decisions. The euphoria of your newfound wealth will eventually wear off. You’ll most likely find yourself in a better decision-making mindset when it does.
It’s equally important to remember that the term windfall means different things to different people. Even a $1MM windfall isn’t the same today as it was 20 years ago. After tax (if it is taxed), it’s more of an extraordinary head start than a golden ticket.
Nothing I have said here is rocket science. Nothing is astonishingly new, either.
What I have said is sound, honest advice that you should consider if you want to become a good saver.
The sad part is that many people don’t follow these simple financial planning suggestions. Many unknowingly spend without considering the long-term consequences of inadequate saving.
For many, the light bulb needs to go off. What many need to realize is that delaying the idea of saving money to another day is no longer the right answer.
Financial planning and financial independence is achieved through years of commitment – years of making good, simple, and honest decisions that will help make your own money work for you.