2 - Save what you do not spend
“We no longer live life. We consume it.”-Vicki Robin
“It’s amazing how fast later comes when you buy now!”-Milton Berlet
“I have enough money to last me the rest of my life, unless I buy something.”-Jackie Mason
“Money brings you the women you want, struggle brings you the women you need.”-Habeeb Akande
“You will never have an income nearly sufficient for your wants. Your wants will always grow faster than your income.”
“A nickel ain’t worth a dime anymore”-Yogi Berra
Don‘t Make This Mistake!
The biggest mistake you can make is assuming you don't have any money to save. If you earn an income, it's simply a matter of how you're spending it. If you make paying yourself first a priority for your future, you will find money to save each month. The longer you wait the more money you will need to save to make up for lost time.
If you saved $500 a month, and assuming a modest growth rate of 6%, you would have amassed - in 40 years - a million dollars. If you would like to have a million dollars in 20 years, be prepared to put a side 4 times more ($2,165) per a month.
Calculations link (Excel spreadsheet)
Cash is king
The best way to have control of your spending is to have a visual aid and cash does this perfectly.
The easiest way to differentiate between a credit card and cash is by keeping in mind that a credit card is a way to ”pay later,” and cash is the way to ”pay now”. Cash tends to make people think twice before buying something they can’t afford and it helps you see the results and the consequences immediately in your wallet. Paying on credit is how people get into big trouble, in most cases because of big purchases. People put too much on their card and spend the next four to six months, or more, paying it off along with a hefty interest. Carrying too much debt can be dangerous as there is a possibility of unforeseen problems arising during the year which could lead to a financial crisis. For those who want to avoid a debt trap, cash is advisable, as it prevents people from going deep into debt because one tends to use cash only for necessary purchases.
The decision of whether to pay by credit card or cash falls somewhere between keeping up appearances and the desire to remain debt-free.
Debit card vs. Credit card
Using your debit card is not the same as using cash. Debit cards also have a downside if you don’t keep track of your purchases; you’ll find out too late that your bank account has been overdrawn and that can cost penalty fees and service charges, which can sometimes represent up to 25% of the balance; that is an expensive debit card compared to a credit card if you ask me (Find out how much your debit card cost here). With credit cards, one can avoid overdrawing his/her bank account. A credit card, on the other hand, allows you to borrow money for almost two months for free (a month before the bill comes and 26-29 day grace period to pay it off). A credit card also still allows you to continue earning interest on your funds that are resting in the bank within that grace period. Of course, if you delay paying the credit card bill into the next month or longer, any interest earned on your bank account may be outweighed by the interest accrued on the credit card bill.
If you limit your purchases to a reasonable amount and you pay off your bills on time, a credit card can provide lots of cheap convenience. You'll enjoy the free loan and still have records of your purchases. But if you tend to rack up bills or have a hard time paying them, a debit card will help ensure they don't go unpaid and can be a good way to restrict your spending.
You can calculate this ratio by dividing what you save every month by your gross monthly income. This ratio is the percentage of your income that goes to build your financial freedom.
As the “Budget guidelines” section on the “Spend less than you earn” page suggested your savings portion should be at least 10% of your income. Now! At this point if you manage to stick to the “G.O.O.D.” plan and pay down your debt, you should be able to carry on paying yourself that 25% (as per the budget guidelines: 15% Debt +10% Savings) of your gross salary.
Some advisers will tell you:
You will need to establish an emergency reserve to save for the unexpected.
You will need a three month’s living expenses account in case you lose your job.
You will need a six month’s living expenses account for medical expenses in case of an accident.
You will need a short-term saving account for money that you set aside for expenses such as a vacation, a computer, a car, etc.
Blah blah blah…
As you have probably guessed, I don't particularly agree with that approach either. You can have as many accounts as you want, but if you’re not consistent on saving your money, you’re not going to be able to put any money in them.
I would prefer the more sadistic approach of saving for my future. 60% of my money is already going toward debt repayment of sorts...(35% Housing + 20% Transportation) so I want a good portion of what is left to definitely benefit me! Let’s fight fire with fire, 25% towards savings like I suggested earlier looks like a great number to me.
Remember: it’s not how much you make, it’s how much you save that will make the difference.
Pay Yourself First
1- Separate needs and wants
I bet that what you truly want is to become financially independent and care free, but what you really need is to take action and stop procrastinating. The first rule of every savings program is, “Pay yourself first”. Deduct the money before you can get your hands on it so you never miss the money and your savings will soon add up.
You might be thinking that 10%, 25% is too much; you’re probably trying to find in your head any excuses not to start saving now or whatever lame justification you use not to start taking care of your future. Change will not be easy, but it will be WORTH IT.
Remember: You shouldn’t buy something just because it’s on sale if you don’t need it.
2- Make fixed payments
Commit to pay yourself first 25% of your salary. Like taking any scary step to the immediate unknown, you know this is the way to financial success. Like I mentioned before, why make a budget when you can just focus on 25% of saving and let the other 75% of your budget take care of itself.
Let’s say: The end of the month is harder than usual, instead of having $100 to finish the last two weeks of the month you just have $50, what would you do in this case? You wouldn’t have a choice but to adapt and manage your money carefully to not die of hunger for the next 2 weeks.
If you're not sure how much to start with, start slowly by saving $25, $50 or $100 per month, whatever works for you. Once you do try never to miss that monthly savings payment. If after three months you haven't felt the difference, try to increase your payments every three months until you get to 25% of your salary. If you start noticing the pinch by month end before you get to 25%, you’re probably spending too much.
Remember: The human being has this amazing ability to adjust to any situation they find themselves in.
3- Do it automatically
The best way to pay yourself first if you’re not as disciplined as you’d like to be is by using direct deposit. Let’s face it, once money is in your possession the temptation to spend it can be irresistible. That’s why direct deposit works so well. Simply take it out from your account right away a set amount each month and deposit it directly into your savings or investment account.
Remember: You and your future are the most important, so put money aside for your savings. That’s what “Pay yourself first” means. Even if you think you will not have enough money to make ends meet, don’t worry you will make it.
$1 saved = $2 earned
If you got a $200 dollar bonus at work, how much more would you take home? You will probably take home about a $100 dollars. By the time all deductions have come off, almost half of your bonus would be gone. Taxes, pension contributions, unemployment insurance, Pension Plan, union dues...they all add up.
Buying at a liquidation sale or simply shopping around for the best price and saving $100 is pretty much the same as getting a $200 bonus. Many people would work overtime on a holiday weekend to earn a $200 bonus, but those same people can't be bothered to spend three hours comparison shopping. It doesn’t make sense! To be called cheap is an insult - it implies a mean and petty approach to money. What some people don’t realize is that to be called thrifty is a compliment - it implies a disciplined, economical and common-sense approach to money.
Remember: “A penny saved is a penny earned”. Every step you take to save money helps!
How to get there from here(Save what you do not spend):
___ Call your landlord regarding rental cost options
___ Shop online for quotes, call your insurance company and revisit or consolidate your home and auto plans; raise your deductible; reduce coverage on older vehicles
___ Review your cable options, packages and compare to other competitors
___ Get rid of your land line
___ Review Cell phone options, packages and compare to other competitors
___ Look into public transit cost and options
___ Start by bringing your coffee or lunch to work
___ Write down some clothing and accessories solutions that might work for you:
___ Write down some entertainment solutions that might work for you:
___ Write down some health solutions that might work for you:
___ Write down some relationship solutions that might work for you:
___ Write down any other solutions you have thought of that might work for you:
___ Open a savings account with your current bank or even better with another institution so you’re not tempted to withdraw the money
___ Pay yourself first: Setup a fixed contribution amount (D)* through direct deposit to your savings account. * From the “How to get there from here (Spend less than you earn)” section.