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How to Save Money

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  • Introduction

    • When it comes to their financial well-being, one of the biggest problems that many people face is how to save money. While the idea of setting aside a portion of their income for a rainy day is an appealing idea in theory, in reality most people find it hard (if not downright impossible) to develop and stick with a responsible savings plan. But while it may take a good deal of commitment and sacrifice for you to reach your personal savings goals, the financial and psychological benefits that can come from a robust savings plan far outweigh the short-term cutbacks that you may have to endure. So, if you're ready to start saving money, the tips and suggestions in this guide will help get you started on the path to financial responsibility.

  • Why You Should Save

    • While the benefits of saving money may seem obvious (MORE MONEY!), there are a number of advantages to having a healthy savings plan that you may have not considered:
      • Emergencies: If there's one certainty in life, it's that unexpected things can happen at any time. Whether it's a natural disaster, an unplanned illness, the loss of a job, or a bad investment, the financial repercussions of an emergency situation can be debilitating if you aren't properly prepared. A well established savings account can help prevent a financial crisis when these situations arise.
      • Debt Prevention: The main reason that people go into debt is because they make purchases that they can't afford. In these instances, they usually turn to credit cards (which charge high interest rates and are often hard to pay off). A well-funded savings account can allow you to purchase the items outright and avoid the pitfalls of borrowing money.
      • Plan for the Future: Everyone has something that they are striving for. Whether it's money to buy a new car, pay for an education, or fund an early retirement, many of the things that we want can end up costing a good deal of money. An efficient and disciplined savings plan can help you achieve those goals sooner and without the drawbacks of debt.

  • Step 1: Make a Budget

    • The first thing that any good financial expert will advise you to do when setting out on the path to savings is to make a budget. An accurate budget will allow you to identify all of your necessary expenses, which in turn will give you the ability to calculate exactly how much you can afford to set aside for savings. Here are some simple steps for setting up your budget:
    1. Time Frame: Before you start your budget, you will need to decide on the time frame that you will use. Is yours going to be a monthly budget, a quarterly budget or a yearly budget? The most popular time frame is usually monthly (due to the fact that most bills come once a month), so that is what we'll use for this exercise.
    2. Income: The first thing that you'll need to do when coming up with your budget is to figure out exactly how much income you have coming in. This should include your monthly salary (after taxes) and any supplemental income you may have coming in (from additional jobs, investments or other income sources). If you are in a salaried position, simply divide your yearly income by 12.
    3. Expenses: Here is where things get interesting. Now that you've calculated how much money you have coming in each month, you'll need to figure out exactly how much you spend during the same period. While some expenses remain constant and are easy to figure out (Rent, Car Insurance, Car Payments, Phone & Cable Bills), others are not so easy to pin down. Expenses such as utilities, gas, food and entertainment may change from month to month, so the best way to figure them into your budget is to come up with a monthly average for each one. Over a three month period, keep a record of how much you spend on each of these things and then figure out, on average, how much you're spending each month. Add up all of these things to come up with a monthly total of your expenses. Use this handy spending worksheet to keep track of your expenses.
    4. Calculate the Surplus: Now that you've figured out your monthly Income and Expenses, you can start to determine how much you have left over for savings. Simply subtract your monthly expenses from your monthly income to find out how much surplus money you have coming in each month. Fill in the figures on this budgeting worksheet to calculate the surplus. While you don't need to put aside this exact amount for saving each month, this figure can help give you a rough idea of how much you can afford to save. Note: If your monthly expenses turn out to be larger than your income, then it may be a good time to figure out ways to reduce your expenses and keep your spending more in line with your income.
    5. Keep Records: While writing out your budget on a piece of scrap paper once every year or so may seem like the easiest way to go, it is wiser to keep a continuing record of your expenses, income and savings somewhere that is permanent and can be easily updated. While software programs such as Quicken, Microsoft Money and online money management services such as Mint.com can make it easy for you to manage your personal finances on the computer, something as simple as a personal ledger or notebook can be just as effective for keeping tabs of your budget.

  • Step 2: Start a Savings Plan

    • Once you've resolved to start saving money, you'll need to develop a plan. While a good savings plan doesn't need to be an elaborate affair, it should include a basic outline of the methods that you will be using to jump-start your savings. Here are some suggestions for developing a practical savings plan:
      1. Set Goals: The best way to figure out how much you want to save is to set specific monetary goals. If there is a specific thing that you are saving up for, start by calculating how much you will need to save in order to pay for it. Next, figure out how much money you will have to set aside each month in order to reach that goal in a reasonable amount of time. If you are saving for something with a less specific monetary value (such as money for an emergency fund, your retirement, or just a healthy nest egg), then you should try and come up with a figure to shoot for (i.e. Financial experts often recommend having enough money in an emergency fund to cover at least 3 to 6 months worth of household expenses).
      2. Keep Track of Your Finances: The best way to make sure that your savings plan is on track is to keep a close eye on your spending. This can include monitoring your ATM withdrawals, keeping a copy of your bank statements, collecting receipts from your entertainment spending and updating your budget to reflect changes in your income or expenses. Not only can this help you identify where your money is going, it can also keep you up to date on how much money you are saving.
      3. Investing: Although most people think of investing as something that is done by people who already have a lot of money, it can also be a way for people with a modest amount of savings to help grow their overall savings. Low-risk investment options, such as Individual Retirement Accounts (IRA), 401(k)s, Certificates of Deposit (CD's) and Annuities can often help people use the money they do have to save even more money. Some banks may even let you set up an Automatic Investment Plan (AIP) which automatically takes a portion of your checking or savings account (as much or as little as you like) and transfers it to an investment fund or retirement account.
      4. Savings Strategies: If your surplus income each month isn't enough to meet your savings goals, you're going to have to figure out some creative ways of saving more money. While you don't need to resort to selling a kidney or donating blood every week, there are a number of basic strategies that you can use to spend less and save more. While each person should come up with their own list of savings strategies, here are a few for you to consider:

  • Step 3: Open a Savings Account

    • One of the most basic tools that you can use to help manage and further your savings goals is, of course, a savings account. Not only do savings accounts provide a safe, secure and convenient place for you to store the money you've saved, they can also (in certain instances) even help build your savings. If you don't have a savings account, it's time to set one up! If you already have a savings account, keep reading to make sure that you have the right one to meet your needs.

  • Different Types of Savings Accounts

    • Not all savings accounts are alike. Here are some of the most common types of savings accounts:
      1. Basic Savings Account: This is the most basic type of savings account that banks will usually offer. People can deposit and withdraw money from their account, the balance of which usually earns a minimal rate of interest (usually around 0.5 - 1% yearly). While savings accounts usually don't allow you to write checks or to take money out of an ATM, this can be a good thing when you're trying to save money.
      2. High Yield Savings Account: High yield savings accounts usually offer better interest rates than regular savings accounts (sometimes 2% more), but come with more restrictions. Most high yield savings accounts have a minimum balance requirement and limit the amount of transactions that you can make each month. If you have enough money and don't see yourself needing to take money out of your account on a regular basis, this can be a good option.
      3. Money Market Account: In general, money market accounts usually pay a higher interest rate than regular savings accounts (and often give you a higher rate for a higher balance), although they carry many of the same restrictions as a high-yield savings account. They do, however, offer you the ability to write checks if you want.
      4. Online Savings Account: With the recent emergence of online banking, many institutions have begun to offer high-interest online savings accounts (anywhere from 4 - 6%). The reason that these institutions can afford such a high interest rate is because, since all of your banking is done online, they usually don't have pay the high overhead costs associated with operating a bunch of actual brick-and-mortar bank branches. Companies such as ING DIRECT and HSBC Direct can help your money grow even faster than with a traditional savings account.

  • Things to Consider When Choosing a Savings Account

      • Minimum Balance Requirements: Some savings accounts require you to keep a minimum balance in your account at all times and will penalize you if you fall below that amount. Make sure that, if your account does require a minimum balance, you have enough money to meet that balance on a continuing basis.
      • Monthly Fees: Banks will sometimes charge a small monthly fee for you to have a savings account, although most will waive that fee if you keep up a minimum balance. You will also want to find out if they charge extra for withdrawals, transfers or other transactions.
      • Interest Rates: As discussed above, the interest rates that are offered by different savings accounts can vary widely. Make sure to research different banks to find the best interest rates.
      • Access to Your Money: Banks have different rules when it comes to how you can access the money in your savings account. While most don't allow you to write checks with a savings account, some may allow you access to make withdrawals via an ATM card. Online banks that don't have any physical branches often require you to transfer money back into your checking account before you can access it (which usually involves waiting a few days for processing). When choosing an account, make sure to consider how often you may need to access your money.

  • Step 4: Curb Your Spending

    • It may seem like common sense, but the easiest and quickest way to start saving money is to curb your spending. Of course you don't need to eat Top Ramen every night and turn off your electricity. But with a little ingenuity (and a few helpful suggestions), there's no reason that you can't find ways to cut back on your expenses. Here are a few to get you started:
      1. Eat Out Less: While eating out can be fun and delicious, it can also take a serious bite out of your wallet. Try eating in more often and packing yourself a lunch for eating at work or at school. Besides saving money, making your own food can often be healthier too.
      2. Eliminate Expensive Coffee Drinks: If you stopped yourself from buying a $3.50 Latte every day from Starbucks, you would have about $100 a month extra to put into your savings account. Buy yourself a simple coffee maker and some ground coffee beans at the supermarket and you'll be able to get your caffeine fix without spending a fortune.
      3. Buy Used or Non-Brand Name Products: While the temptation to purchase the latest product from the top manufacturer on the market can be strong, the money that you can save by buying used and non-brand name products can be substantial. Refurbished or "Like-New" products are often just as reliable as new ones and can cost significantly less.
      4. Eliminate Unnecessary Expenses: No matter how frugal you think you are, there are always ways more ways that you can cut the fat. That subscription to Angler's Weekly that you never read? Those 500 cable channels that you never watch? That 5,000 minute-a-month phone plan that you never come close to reaching? All of those can go.
      5. Energy Efficient Light-Bulbs: Although it may cost slightly more in the short term, installing energy efficient light-bulbs throughout your house can greatly reduce your electricity bill (not to mention being better for the environment).

  • Step 5: Get Out Of Debt

    • While we won't get into the specific details of the often complicated measures that many people will need to take in order to get out of debt (for more information on that, see Mahalo's guide to How to Get Out of Debt), we will go over the ways in which having debt can prevent you from saving money and how you can starting turning that around.
      1. Pay Off Your Credit Card Debt: While having a credit card that you pay off in full each month is perfectly acceptable (even recommended if you're trying to build up your credit), having an outstanding balance that you have to pay interest on is a recipe for disaster. Think of it this way: Calculate how much money you pay in interest on your credit card debt (not paying off the balance, just the interest). Then figure out how much money you would have if you were to put that money into a savings account rather than into the pockets of the credit card companies. You get the picture.
      2. Don't Buy Things You Can't Afford Outright: One of the main reasons that people go into debt (and consequently cannot save money) is that they buy things they can't afford on credit. Even if you eventually pay off the debt, the extra money that you pay in interest will mean that you've payed more for the item than it was even worth in the first place.]
      3. Save Money to Pay Off Your Debt: The same principles that you can use to curb your spending and start putting money away for savings can also be used to save up enough money to pay off your debts. Start by figuring out how much debt you need to pay off, and then calculate how much you will need to save each month in order to pay it off in a reasonable amount of time (don't forget to calculate the interest in). Once you've gotten yourself out of the red, you can finally start working your way towards a healthy degree of savings.

  • Conclusion

    • Even the most responsible, intelligent and practical people can sometimes become overwhelmed by their finances and have difficulty saving money. So if you are one of those people who can never seem to save enough money, don't worry! You are not alone. No matter how inept you think you are at saving, there is hope. And while it may take some changes to your lifestyle and spending habits, the steps discussed above can help get you on your way towards your savings goals. Because the temporary thrill that you get from spending money can't come close to the satisfaction and sense of accomplishment that you'll feel when you look at your bank account and see all the money you've been able to save.

  • Resources for How to Save Money


 


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