This article is for information only and doesn't call for any action.
Saving money, or the saving habit as Napoleon Hill put it so many years ago, is the foundation of all financial success, including investing. Having money saved is what provides the means for you to take advantage of situations, whether it's going back to college, starting a new business, or buying shares of stock when the market crashes. These saving money resources will provide a foundation and answer questions such as, "How much money should I be saving?" and "What is the difference between saving and investing?". You'll also learn the best places to save things like down payment money on a house.
Saving Money vs. Investing
Did you know there is a huge difference between saving money and investing? Unless you were fortunate enough to be the child of a wealthy banker or investor, it's unlikely anyone ever taught you this. Both saving money and investing money have their place in your life but they have very different roles. How you handle them can have big implications for your financial success, stress level, and how wealthy you ultimately become. It can even mean the difference between suffering through a recession or depression with white-knuckles or sleeping soundly through the night knowing you have enough spare liquidity on hand.
Does Saving a Few Dollars Really Matter?
Even if you are committed to saving money, you may find yourself falling into the trap of spending an extra $5 here, or $13 there, thinking, "It's not that much. I'll never miss it." Depending on your age, this could be a huge mistake. One of the cornerstones of saving money is understanding the time value of money - that is, the concept that $1 today is more valuable than $1 a year from now. This single money saving tip could help you transform your balance sheet over the next ten years as you free up cash to put into reserves.
How Much Money Should I be Saving?
Everyone knows saving money should be a top priority and most people are smart enough to look for saving money tips, but how many people actually know how muchmoney they should be saving? Most folks mistakenly believe that saving more money is better, saving less money is bad. Don't get me wrong, that's true in a general sense, but depending upon your needs, lifestyle preferences, and income, the amount of money you need to save and have available in the event of a disaster or golden opportunity could be very different from your friends, family, and neighbors. Comparing yourself to others is often a mistake that will end up in unnecessary heartache and stress so you would be wise not to do it. The article I link to at the end of this paragraph was put together to help you come up with a rough calculation as to what might be appropriate for your situation, though it's important you still talk to your qualified financial adviser before making a decision. My hope is that it can help you gauge whether your expectations are reasonable based on your circumstances and goals.
The Key to Saving Money is to Pay Yourself First
The single best way to begin saving money is to use a technique called pay yourself first. This technique has been proven time and time again to cause people to change their behavior. In fact, I would say it is probably the single most important money saving tip that's ever been developed.
5 Ways to Make Saving Money Easier
It goes without saying that sometimes, saving money can be difficult. As life often throws at us, unexpected events inevitably occur, impeding your savings schedule and routine. To help those of you struggling along the path to financial freedom, I've put together these five saving money tips; each designed to help make the process of saving money a little easier so you don't have to stress out as you work toward your goal.
1. Keep Perspective. Saving and Investing Are Important But They Are Only a Means to an End
Your investments and savings are ultimately a means to an end. The value of your portfolio rests in the enjoyment and security it provides for your family. This is often the reason normally rational individuals behave irrationally when it comes to their stock holdings - they secretly view each up and down tick as feast or famine. It's foolish; nonsense. Money is a tool. Nothing more. Nothing less. It exists to serve you and accomplish whatever it is you want it to accomplish for your life, be it making you more comfortable, giving you control over your career, living in an area you love, giving your children and grandchildren a head start in life, or being able to pursue a passion that you otherwise would not be able to afford.
The moment you begin to prioritize saving and investing for its own sake, you're probably going to make bad decisions and miss out on some of the most valuable experiences in life. For some people frugality becomes a type of sickness; a religious-like asceticism that enslaves them to the debits and credits on their personal ledger.
2. Saving and Investing Becomes a Lot Easier When You Step Off the Consumption Treadmill
On a related note to the last item, just as you can be too parsimonious, you don't want to turn into a total profligate, unable to deny yourself by choosing what you actually want over your short-term desires. Moderation is the key. Prudence and temperance is the secret. In the same way consuming too little or too much food or drink can cause misery and death in the body, so too can hoarding or squandering capital in the soul.
You probably know what I mean. You see people who always have credit card debt; who always need a new car even if they can't afford it. They go through life making a good living but hardly ever able to scrape two pennies together unless they're promising to sell future hours of their life (which is what happens when most people borrow money - you're quite literally agreeing to give up some of the 27,375 days you've been given if you're a perfectly average person plus interest, in many cases). To add insult to injury, these folks hardly ever think about lifecycle costs or economies of scale. They could live so much better than they do if they were only intelligent about it but impulsiveness wrecks any hope of that.
If this is an area with which you struggle, I'm a fan of a behavioral psychology tool called "gamification". Effectively, you take the rules, rewards, and mechanics of a video game, board game, or other game and apply it to your personal economics. You make it a personal challenge to find ways to purposely cut expenses by $100 a month and move it into savings, instead, walking home instead of taking the bus or skipping ordering a glass of tea with lunch, requesting water, instead. It becomes its own reward system. There are numerous phone apps, tablet apps, and software programs these days that can do it for you, even allowing you to create avatars that level-up at pre-determined milestones.
It's worth it. You must master this if you have any hope to enjoy life. You can never experience financial freedom until you have stepped off the consumption treadmill.
Once you slip into the habit of borrowing tomorrow’s income to pay for today’s expenditures, you will begin to loathe money and possibly even your job or occupation. Instead of viewing it as an outlet for your talents, gifts and ambitions, it becomes a series of endless tasks you must complete if you hope to break even at the end of each month.
3. Saving and Investing Money Becomes a Lot Easier If You Setup Auto-Withdrawals from Your Checking or Savings Account
Many brokerage firms allow you to set up regular deposits by electronically transferring money from your checking or savings account each week, month or quarter. This is a very effective way to begin saving because you don’t actually see or miss the cash as it is moved directly into your brokerage account. On the same note, if your employer offers an automatic withdrawal option for your retirement account, you may want to consider joining.
4. Educate Your Mind. The More You Know, the More Excited You Get About Saving and Investing Because You Realize You're Buying Yourself Freedom
There are hundreds of excellent finance, investing, economics, accounting, business and management books in the world. A few hours of well-directed reading each week can have a fattening effect on your pocketbook as well as give you something to talk about with your friends and family. One small example is how fun it is to see the world through the lens of creating passive income; of measuring your annual success through the level of passive income you generate each twelve months. Another is learning how you can get paid in exchange to promise other people you'll buy a stock you wanted to buy, at a price you wanted to pay. It sounds crazy but it's true.
Consume knowledge. Amass wisdom. Be a learning machine, always adding to your arsenal of practical, applicable strategies and techniques. A few good ideas spread out over a lifetime, intelligently implemented, can mean all of the difference.
5. Saving and Investing Money Is Easier If You Reward Yourself from Time to Time
Clipping coupons and reducing household expenditures does not mean you have to live the life of a miser. Once you've established your personal investing goal, reward yourself for reaching specific milestone. Perhaps take a vacation once you cross your first $100,000 in savings. Maybe allow yourself to buy a lake cabin when you pay off all of your debt and have a solid emergency fund; a place where you, your children, and your children's children will spend summers. Figuring out how to space rewards with goals that cause you to reach, to deny yourself just enough to be uncomfortable and the accomplishment truly is a personal, emotional victory, may take some time but it is worth it.
Positive economic incentives can do marvels for productivity, and you may not find it nearly as difficult forgoing current consumption if you know a new pair of Allen Edmonds is in your future. Besides, when you associate a luxury good with an accomplishment, it has much more meaning and value.