Establish a Regular Savings Program
The first strategy is to set up a regular savings program if you do not already have one. Saving means putting money aside from present earnings to provide for a known or unexpected need in the future. It is an integral part of family and personal financial planning. Having a specific goal provides motivation to save. You probably will not get very far saving for the sake of saving.
Needs versus Wants
Individuals and families save to satisfy their needs and wants. Needs are items that are necessary for survival such as food, shelter, clothing, and medical care. Wants are all the other things we think we need, but could do without. If we spend our money to satisfy wants before we meet our needs, we will probably experience financial difficulties.
Generally speaking, four major financial needs require planning for in the near and distant future:
Once goals have been set, a major thought in most people’s minds is “How am I going to reach this goal? There is no way I can save that much money!” However, most people find that, if they really put their minds to it and they have set realistic goals, they can save the necessary money.
As we noted earlier, a regular savings program is critical to a family’s immediate well-being as well as their long-term security. To adequately fund a savings program and begin an investment program, you must identify a specific amount to save from each paycheck and honor that commitment. Regular savings in small amounts is generally more effective than setting aside larger sums at sporadic intervals. As your salary increases, increase the amount you commit to savings.
Pay Yourself First
Another important concept for your savings program is to “pay yourself first.” Make your “savings bill” a part of your spending plan, just like rent or mortgage payments, utility bills, clothing, car payments and upkeep, child care, or any other bill that you normally incur. When you pay your other bills, pay your savings bill by depositing the money into a savings account or other financial instrument. One painless way to accomplish this is payroll deduction if it is available. Your employer deposits your savings directly from your paycheck into a credit union, bank account, or a money market fund for a higher interest rate. If you never see the money, you won’t miss it or be tempted to use it for something else before it reaches your savings account. Note how quickly small amounts of money can grow with time by reviewing “How $10.00 a Month Will Grow” (Refer to Table 1).
Save Bonus Money
Saving “bonus” money is also an easy strategy. Bonus money is money earned or received that was not expected, such as tax refunds, gift money, overtime pay, rebates, and refunds. Saving this money over time will boost your saving dollars and provide a larger balance on which to earn interest for the future. (Note: if you consistently receive a large tax refund, you may want to adjust your withholding. A tax refund means that the government has had your money interest-free during the year; you were losing the use of the money to fund your financial goals.)
Save Coupon Money
Another strategy to boost your savings is to save coupon money. Many people use coupons to reduce their grocery and personal care bills, but few think of actually saving the money they saved! To make this strategy a reality, put aside the amount you “saved” by using coupons at the grocery store or drugstore. The amount saved is probably printed on each receipt. Put the “savings” (the money you did not spend) in a special “coupon saving jar.” Every month or so add this cash to your savings account. Saving just $2 a week for 52 weeks gives you a savings total of $104 which could be your “seed” money to open an investment account. However, remember that you aren’t saving if you buy something that you don’t need or that costs more than a comparable product even with the coupon.
Continue Installment Loan Repayments
Most of us have one or more installment loans that we are repaying. Once you pay off an installment loan (assuming other loans are not overdue), continue to make “payments” to your savings account. For example, when you pay off your car loan, continue writing a check for the same amount, but make the check payable to your savings account. You were able to get along without this money for the duration of the car loan, so continue to live at the same level and save the “car payment.” This is a good way to save for the down payment on your next car when the old car needs to be replaced. It also adds a substantial amount of money to your savings account on a regular basis. This same strategy can be used when other household expenses end (e.g., childcare).
Collect Loose Change
Another painless strategy is to collect loose change. At the end of each day, empty out your pockets and wallet and put the change in a special container. Every other week or once a month, deposit the change in your savings account. Don’t cheat on yourself by “stealing” change that has been collected. Take it all to the bank. Some people even go so far as to keep all their change. They only pay for cash purchases with bills and save all their coins. Develop a plan that works for you and stick to it.
Save Lunch Money
Saving lunch money is another way you and your family can save money. Get up 10 minutes earlier and make your own lunch. Save the money you would have spent on lunch. If all family members do this, the family can realize a nice sum that they can add to their savings. Working together to reach a family goal, such as a new TV or a summer vacation, can be an excellent family activity.
Shop for Sale Prices
Another strategy that can work for all family members on a wide variety of purchases is to save the money you “save” when you buy items on sale. When you buy an item on sale, save the difference between the sale price you paid and the “full” price you would have paid if the item had not been on sale. Put this money in a safe place and on a regular basis deposit it into your savings or investment account. Using this strategy can add large amounts to your savings program. The key is that you actually save this difference and apply it to your savings or investment program.
Plan a “Nothing Week”
Once in a while, have a “Nothing Week,” an entire week when you and your family agree not to spend any more money than is absolutely necessary. You would not go to the movies, out to eat, bowling, etc. Plan to do special activities, but save the money instead of spending it. Add this money to your savings program. Another similar strategy is to use a crash budget approach. A crash budget works like a crash diet — you try to cut out all unnecessary spending and save as much as possible in a given period of time, say two weeks or a month. Add all the savings to your savings or investment program. If the “Crash Budget” sounds unbearable, consider a “Cut-Back Week.” During this week, do what the family would normally do, but think of ways to make it less expensive and save the difference. For example, rent a movie instead of going to the theater, brown bag lunch instead of eating out and drink mix-your-own lemonade instead of soft drinks, etc.
Avoid Paying Credit Charges
A critical savings strategy to consider is avoiding the use of credit. Unless credit purchases are paid off in full each month, interest consumes dollars that could be spent funding your saving and investing goals. Suppose that you have a balance of $1,000 on a credit card that carries a 19.8% interest rate and a full grace period. If you make no more charges against the account and only pay the minimum payment of 3% per month, you will pay approximately $165 in interest over one year. If you continue making only minimum monthly payments for the rest of the $1,000 with no additional charges, you will take eight years and three months to pay it off, and you will have paid $843 in interest.
Carefully evaluate all spending decisions, especially those being paid with credit. Make every spending decision on the basis of how it will satisfy your goals. Eliminate spending for items that have little or no value relative to your goals. Also be aware of your needs and wants as you make purchases.