How To Save Money.

One of the most talked about topics in personal finance is the question of how to effectively save money. This should be no surprise, as saving money is never easy. And yet, we all believe that saving money is important. So, why is it so hard? And what can we do to turn things around? Here are a few ideas.

1. Question whether you really need to save money in the first place.

The first thing that needs to be understood about saving is that it is not always a good idea.

For example, suppose that your income is below the poverty level. That is, suppose that you are single and make less than $12,000 or are married (or live with your partner) and make less than $15,000. In this case, you are not making enough to live off of, and should be spending all of your money on consumption, rather than saving any of it.

For another example, suppose that interest rates in your country are extremely low (as they are now in the U.S.) and that capital gains taxes and dividend taxes are extremely high (as they are starting to be in the U.S.). These are good reasons to consider not saving or investing, as the benefits of saving and investment are partially dependent on these factors. Saving has a very real cost in the form of lowering your consumption now. This cost is mitigated when interest rates are high and taxes on investment are low, but not when it is the reverse.

Having said this, there are many good reasons to consider saving. Here are just a few reasons to save that are rationally justified.

1. You plan on making a large purchase, such as a big-screen T.V. or a new car.
   
2. Your health insurance has a deductible, and you need to have enough savings to cover it if you get sick (or, even worse, you don't have health insurance at all and have to pay all of your medical bills out-of-pocket).
   
3. You don't love your job enough to do it every day until you die, or it is the kind of job that you can't do forever because of the physical requirements of it. In this case, you want to “retire” some day and spend your time doing what you truly love to do, instead of what you have to do to pay the bills.

If you fit into any of these categories, then saving some of your money may be a good idea. But even in this case, it is not going to be easy. So the first thing you need to do is to not lie to yourself about whether you truly want it or not. Are you really saving because it benefits you? Or are you just following vague advice from the society around you that you “should” save whether it is good for you or not? If you think deeply about this question and realize that you really do want to save for your own good and not for any other reason, it will go a long way towards motivating you to accomplish your plan to save.

2. Create a timetable.

Once you have decided that saving money really will benefit you, it is time to create a timetable. Figure out on what date you want to have that big-screen, 3D television or new car you've been dreaming of. Decide how long you are willing to tolerate the chance of getting sick and when you need to have enough money to cover your future medical expenses. Plan on the year that you are going to retire and exactly what wonderful things you are going to spend your time on once you are no longer working at your day job. Get an exact date and determine how much money you need to accomplish these objectives.

Once this is done, calculate your rate of saving based on the timetable you've just created. How much money do you have to save each year to reach your objective? How much do you have to save each month? How much per week, or per day?

3. Write down all of your expenses.

Here's where the hard part comes in. Even if you have convinced yourself that saving money really is in your own interest, you will often find yourself compelled to spend too much money anyway. Human beings are creatures of habit, and if you have been spending all of your income every paycheck till now, you will at first likely be unable to stop yourself from following this old habit.

The key to overcoming this problem is to concentrate first on writing down every thing that you spend your money on. At the end of your first month, this will give you a clear understanding of where your money has been going. Once this is done, you can decide on what expenses can be cut so that the money you need to save will be made available.

For example, perhaps you know from your time line that you need $40/month to save, and maybe you find that you are spending that much on candy bars each month (1 candy bar a day, at $1.50 per bar, = $45 in 30 days). So, you decide not to eat any candy bars anymore. If you actually know how much money you are spending on candy bars, and that it is keeping you from buying that T.V. (or retiring, or whatever) then this can be all of the motivation you need to break the habit. On the other hand, if you don't know how much you are spending on candy bars, you are likely to say to yourself “well, it's only $1.50, so what harm can it do?” Thus, your ambition to save will be defeated. Writing things down will stop this from happening.

4. Re-assess your goals from time to time.

Once you've got this system in place and have begun saving, the hard part is over. As you continue to save, being thrifty will become part of who you are, and will no longer be as much of a struggle as it used to be. However, there is one more thing that you need to do: re-assess your goals as time passes.

After you save for a while, you may find that you have gone too far in cutting your costs. Maybe your life really is worse off now that you've given up candy bars, for example. Maybe you would be better off if you ate one every once in a while, but no more than once or twice a week. If you decide to change your habits again and increase your consumption while reducing your savings, it is important that you come up with a new timetable that reflects this new set of values. Don't just throw out the first timetable and go back to being a big spender. Save less, but still save. This way, you can still retire at some point in the future while still enjoying yourself right now.

Saving money is not easy, but it can be done. If you need more information about how to start saving, contact us.