That picture? That’s how I want to spend my days: sitting on the beach, in the shade, with a cool drink. One way I’m going to make that happen is by saving money so that I have more financial freedom.
Saving isn’t always easy, but it is always easier if you have a plan. Use these five simple savings tips to build up your savings.
The single biggest reason that people fail to save is that they never start. It is easy to convince yourself that you can’t afford to save, or that you’ll just wait until some certain point in time and then you’ll suddenly start saving tons. We’ve all done it: “When I’m not paying for daycare,” When I pay off my car,” “When I get a raise.” Stop waiting to save and just start doing it! Even a few dollars each month is a good start, and it will help create the savings habit.
When I first opened an IRA (Individual Retirement Arrangement) some 20 years ago, we barely had enough money to buy groceries. I think we started with $25 dollars a month, which seemed like a fortune. We rapidly discovered that we would adjust our spending if the savings came out automatically. We increased our contribution a little bit every year, and now we are contributing the maximum amount to both IRAs every year without even thinking about it.
If only we had been so conscientious about our other savings! Which is another point: you can’t change the past, you can only change the future. Maybe you are kicking yourself because you didn’t save more in the past. Let it go. Change your course now.
Don’t Stop Saving
This seems obvious, but it is a mistake I’ve made. Once you start saving at a certain rate, don’t decrease that rate or stop saving altogether unless you have absolutely no other choice. As in, you won’t eat if you keep saving for retirement. Not just, “Oh, things are a little tight,” or “I’ll just free up a little bit of money by decreasing my savings.”
A few years back, we were looking at a challenging year. Two moves within 10 months, and a house that we couldn’t rent for full market value because we’d only be gone those 10 months. To make things easier, I stopped the automatic contributions to our IRAs. “Just until we get settled,” I thought. I should have known better. It took nearly three years for me to restart those IRA contributions. What a waste of an opportunity! We’ll never get those years back. In retrospect, we would have survived if we had continued our contributions. It would have been tough, but no one was going to starve. Learn from my mistakes!
Increase Your Savings Regularly
Increasing your savings rate is much like starting saving: you adapt quickly if you just do it.
- If you were saving $25 per month last year, increase it to $50 and see what happens.
- If your retirement contributions are based upon a percentage amount, raise the amount you contribute by one percent.
- If you get a raise, put at least half towards your savings.
- If your pay includes a yearly cost-of-living adjustment (like military pay), increase your savings when you get that adjustment.
- If you receive surprise money, like a bonus or inheritance, save most of it.
Stick with it, and one day you’ll discover that you are saving a lot of money each month without feeling broke all the time.
As I said, we started saving with a very small amount of money every month. By using the savings tips listed above to slowly increase our savings, we are currently putting away the maximum into all of our retirement accounts – that is about 25% of our income. The best part is that we don’t even think about, and we are used to living without that money. It’s like magic!
Keep The Rest of Your Finances In Order
Savings can only continue and grow if you have the rest of your finances in order. If the rest of your financial life is a wreck, you’ll just end up tapping your hard-earned savings to deal with emergencies and surprises that crop up. This includes:
- having an emergency fund
- having appropriate insurance
- eliminating debt payments
- having low fixed monthly expenses
These foundations put you in a good position to maximize your savings and accrue some real wealth.
Choose Smart Places To Put Your Savings
There is no single right place to keep your savings, but certain financial products are better for certain goals. Don’t put off saving because you’re not sure where to save, but also don’t stick all your savings in a savings account that is earning 1/4% interest, either. There are simple choices for every situation.
Emergency funds should be kept in easy-to-access accounts such as savings accounts, money market accounts, or short-term Certificates of Deposit (CDs). We keep our emergency fund in a money market savings account, but we periodically transfer some to CDs when rates are attractive.
Savings for specific goals should be chosen based upon the length of time you have until you need the money, your comfort with risk, and the consequences if the time isn’t right when you plan to withdraw the money. For example, you would want a different type of account or investment for money for a vacation next year vs. money for a dream retirement trip in 30 years.
Retirement funds are absolutely best saved in a tax-advantaged retirement account, because tax advantages are good. I like Roth products such as Roth IRAs or Roth TSP accounts for about 97% of savers, but traditional products are sometimes a better choice for certain situations. It is more important that you start, you can figure out the details later.
In many cases, college savings should usually also be in tax-advantaged educational savings accounts, such as 529s.
None of this is rocket science. Most of us fail to save because we procrastinate, or we try to make it harder than it is. Focusing on these five basic savings tips will help get started and stay on track.Saving isn't always easy, but it is always easier if you have a plan. Click To Tweet
Which part of savings are you good at? What mistakes have you made? Are you happy with your overall savings so far? What can you improve in the future?
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