These days it seems like people have forgotten a basic rule in life – always have at least 6 months of living expenses in cash in an interest-bearing savings account for any emergency (which you know happens more often that you would expect). How many of us actually have this? I think the lesson in this economic turmoil is that the most important gift we can give ourselves is sufficient savings.
Saving money is actually pretty simple to do and does not have to drastically affect your lifestyle. Interestingly enough, it follows the rule of dieting. If you’ve ever tried to lose weight, you may have found that cutting out the foods you love completely, usually doesn’t work in the long term. Although there are a few of us that have the will power to end our habits “cold turkey,” for most of us it just isn’t realistic. Many of us have learned the hard truth that if you try to make a fast and permanent switch from eating burgers and fries to salads and water, it just isn’t going to work.
This concept is perfectly analogous with that of a savings plan. If you try to save too much at one time, your quality of life will suffer and it is unlikely that you will be able to continue your savings plan in the long-term. You could become a yo-yo saver!
The solution is to save frequently in small amounts, without limiting your lifestyle. This method is just like how one changes eating habits to include more fruits, vegetables, steamed fish and grilled meats. You will not crave more food because you are still eating enough to satisfy your body. In the same way, you will not crave to unnecessarily spend money because you are not hording your salary. You are incorporating saving into your lifestyle.
The only way to make this a lifestyle change is, instead of saving in big chunks, set up an automatic savings plan that transfers small amounts out of your checking account and into a competitive interest savings account each week or each month. You have a busy life and hardly have time to go to the gym or cook your own food, how do you expect to put money away on a regular basis? Well, just like you wish you had a chef to make you nutritious food in normal portions and a personal trainer to motivate you and instruct you on the best possible workout, automatic transfers perform the same job with your money – and it’s free! The chances of you sticking with a savings plan are much higher with this method. There are great no-fee, no minimum, FDIC insured savings accounts such as ING Direct and FNBO Direct.
But I Don’t Have Extra Money to Save!
I know times are tough but I bet you do. Again, using the diet analogy, when you are on a diet you keep a record of everything you have eaten. So try recording your expenditures for 7 days by carrying a small notebook around. I guarantee it will be eye opening! At the end of the week, peruse your notes and you just might find some extra money that could have gone into a savings account. Even $20 a week makes a difference when it comes to compound interest.
The general rule of thumb is that you should have six months of living expenses in a savings account before you move on to investing. When you do start investing, the same principle applies but this time it is called dollar cost averaging. You set up an account, choose a few mutual funds and set up a transfer of, say, $100 a month. That way, when the price of the mutual funds are high, your $100 buys fewer shares and when the price is low, the $100 buys more shares. Sharebuilder is a company that allows dollar cost averaging at low cost. I did this on a monthly basis when I first started working and was able to have enough to go to graduate school 5 years later.