Here’s the biggest mistake almost all people make when it comes to savings: They pay their bills, buy their food, make repairs, buy things for the house, pay for kid’s activities, go shopping for clothes, go to the movies, go out to eat, go shopping for some new clothes, etc., etc., and then save what’s left over at the end of the month. Can you see the problem with this? Is there ever anything left at the end of the month??
Many people will also say that they live paycheck to paycheck, but here is the interesting thing about this; They are saying this no matter what the size of their paycheck. The person who makes $300/wk. is saying it and so is the person who makes $600/wk. and the one who makes $3,000/wk. and on up. Right up to that athlete or rock star who is making several million dollars a year and blowing it all, only to go bankrupt when the income dries up.
It seems to be just human nature to live just up to your income level whatever that may be, or even a little above that (accounting for all the debt people tend to find themselves in). But if you want to save money the only way you can do it is by living below your means, whatever they may be. Another way to put this is: You don’t save money by how much you make, but by how much you don’t spend.
The great investment “guru” Warren Buffet puts it this way:
This is great advice, but how do you do it? Well the great US of A knows how. You pay taxes every year, right? Does Uncle Sam just let you have your full pay and then ask you to cough up the taxes on April 15th? You bet your sweet bippy he doesn’t, because he knows what would happen. People adjust their lifestyle to however much money is coming in. So he just takes his cut up front and people adjust to living on what’s left.
Well you can do the same thing for yourself. Just take it off the top. The U.S. government even gave people a means to do just that by starting the 401K program, giving you a tax advantage and a way for you to save money by skimming it right off your paycheck without even ever seeing the money. If you have this offered at your place of employment you should certainly be taking advantage of it. Some generous companies will even match your contribution dollar for dollar up to a certain amount. Free money! Never pass up this opportunity!
But even if you don’t have the opportunity for a 401K (or 403B, TSP, etc.), you can still make the magic of automatic savings work for you. All you have to do is set it up once for yourself and done. Savings skimmed right off the top. Out of sight, out of mind. You will quickly adjust to living on what remains.
How you set this up depends on what you are saving for. Your first savings goal should be your retirement. I know this sounds kind of backward or counterintuitive, but because you need such a large amount, and because it makes such a difference when you start compounding that interest early, it is imperative that you start this ASAP!
If you don’t have a 401K then you can set up your own retirement account in a Roth IRA. I recommend you do this by opening up a discount brokerage account at a firm such as Fidelity or Vanguard. This gives you many options on what to invest your money in inside of your Roth IRA and gives you complete control over it. Once you have your Roth set up it is quite simple to set up automatic payments of whatever amount you choose monthly going from your checking account into your IRA.
Whether you have a 401K in the workplace or your own Roth IRA, you can also set up similar automatic payments going into (online) savings accounts for your other savings goals (wedding, car, house down payment, education, etc.)
Once you have your savings goals set up automatically in this way, you no longer have to stress about money. You are all set for your future needs both short and long-term, and you can spend what’s left freely. Won’t that be a nice feeling!