How To Save Money

At A Glance – Developing the habit of saving money is the key to your financial stability. It is your SuperPower. Even if you’re not a natural saver, it is a skill you can learn.

What Does It Mean To Save Money?

Saving money is living on less than you earn. It’s setting aside some money from every paycheck. It’s building an Emergency Fund. It is being intentional now to secure your future.

Why Do You Want to Save Money?

Saving Money Is The Most Important Step In Building Wealth

Let me say that again…It is THE MOST IMPORTANT step in building wealth. Your future financial stability and your retirement depend on it. Every dollar you save now could keep you from being the greeter at Walmart when you’re 75!

Becoming a saver will be the key to your financial stability and financial independence. Some of us are natural savers, and some are not. I am NOT a natural saver, but I have learned how to be a saver. It is like a muscle you need to work out. You keep exercising and over time, it gets easier

Save For Short, Medium And Long-Term Needs

The money you save can be earmarked for short-term, medium-term and long-term needs. Short-term would be any money you need in the next 1-3 years. This could be your Emergency Fund, money for next year’s property taxes/insurance or a vacation.

Medium-term savings is for 3-6 years. This could be saving to pay cash for your next car, the down payment for a house or the AC/Heater that will need to be replaced.

Long-Term savings, 6+ years, would be for things like your child’s college expenses, a new roof and retirement.

Having Money Saved Smooths Out Your Cash Outflow

Having money saved allows you to pay for large expenses without using credit. If you know you will need a replacement car in 5 years, you can create a sinking fund to pay for the car. Save 1/60th (5 years = 60 months) of the car’s expected price per month into your sinking fund. In 5 years you can purchase the car with cash and avoid all loan charges and interest.

Do the same with other large purchases like insurance, taxes or car repairs. If you save a little every month for those items, you can smooth out the cash outlay. That way you don’t have to come up with thousands of dollars all at once for a major purchase or repair.

I use this strategy to pay for our car and homeowners insurance. I save 1/12th of the insurance cost every month and then pay cash for the new policy. I don’t have to pay any extra fees for them to bill me monthly. It took a while to collect the money when I started using this method. At first, I paid that month’s bill and set aside a little extra. Over time I was able to collect enough to pay the entire policy at once.

How to Save Money?

Spend Less Than You Make!

It’s so easy to say and so hard to do sometimes! This is an area where I failed when things got bad for us. Sometimes we weren’t spending more than we made, but we were surely spending it ALL. You have to spend less than you make. The difference is ‘The Gap’. The bigger the gap, the more you can save.

Track Your Spending

Tracking your spending is one way to discover if you have any gap. If you track your spending, you can see where your money is going. Tracking helps you see where you might be overspending and where you can cut.

I recently read a story of a person who discovered they were overspending their income by $3,oo0 a month! You might be thinking, “How can that happen!” The answer is easier than you think. Remember my mantra…Pay Attention! This simply happens because we don’t pay attention.

Use A Budget

Using a budget puts guardrails on your spending. Once you get a picture of your spending by tracking it, you can create a plan for your money with a budget.

A budget helps you to grow the gap. Include your savings in the budget as a line item and then increase it every chance you get. Set a goal to save at least 15% of your income and increase it as you can.

Pay Off Your Debt

If you are carrying any debt other than mortgage debt, it needs to be eliminated. You cannot make headway with saving if you are weighed down with debt. You don’t have any control of your life when all your money is spoken for before you even earn it.

Check out my debt payoff article, How To Pay Off Credit Card Debt In 6 Steps.

Use Your Employers Free Money

One of the best ways to boost your savings rate is to use someone else’s money! If you have access to a retirement plan at work, such as a 401k, see if your employer matches. Most employers will match your contributions up to a certain amount. If you have a 401k with a match, be sure you contribute at least up to the match. That’s free money!

Tip: A lot of people think if they get the match, they have maxed out their 401k contribution. You can likely contribute far beyond the match. The max contribution to a 401k for 2021 is $19,500. If you are 50 years old or older, you can add a catch-up contribution of $6,500 for a total of $26,000. And these limits do not include the employer match. Check with your plan administrator and tax professional for details about your plan and your tax obligations.

Where To Put Your Saved Money?

Short-Term Savings and Emergency Fund

Any money you will need within the next 3 years is short-term savings. This includes your Emergency Fund. You do not want this money to be at risk. Therefore, a savings account or money market account is a good choice. These can be found at your local bank, an online bank or an investment firm such as Vanguard, Fidelity or Schwab.

Interest rates for savings accounts are next to nothing these days, but you don’t expect to earn a lot on short-term savings. You just want to make sure your money will be there when you need it.

Medium-Term Savings

Money needed in the 3 – 5 or 6 year time frame is medium-term savings. This money can stand a small amount of risk in order to realize some gains.

For this fund, we personally keep our money in a conservative bond fund. This fund does fluctuate up and down, but only in small amounts.

Long-Term Savings

Any money that is not needed for 6 or more years is long-term savings. This money can stand the most risk in order to enjoy the most gains. It can be invested in a variety of ways. A balanced fund, equities such as low-cost index funds or rental real estate are some of the choices for your long-term savings.

Tip: Look for a future post on investing. In the meantime, check out J. L Collin’s book, “The Simple Path to Wealth.” If you’re new to investing, this is a great place to start. It helped me understand the stock market, how it works and how to not be afraid of it.

When investing, remember that at any one time your investments might have gained or lost money, but over time, they usually gain. It’s time in the market that counts. I am retired and 65 years old, but I still have the possibility of a 30-year investment horizon.

The most important tactic for your long-term savings is this…DON’T TOUCH IT!

When To Save Money?

Early And Often

Save as much as you can as often as you can. Every dollar you can squeeze out of your budget will make your future more comfortable and less stressful. Especially if you are starting late like I did.

I’m not saying you need to live on beans and rice until you retire. Strike a balance between a life you enjoy now and a life that will be what you dream of in retirement. To read how one dollar today can turn into many in the future, check out my article on the power of compounding

Pay Yourself First

When I first started getting my finances in order I heard people say, ‘Pay yourself first.’ I didn’t even know what that meant.

Paying yourself first means to set aside your savings BEFORE you pay your bills. You are paying your future self.

If you were to look at my pre-retirement budget, the first line item was Tithing/Giving and the next was Savings. Pull out your savings first, then live on the rest. You Can Do It!

Automate Your Savings

Brad Barrett on the Choose FI podcast says to get your ‘Lizard Brain’ out of it. What does that mean? Automate everything you can. Especially your savings. That way you don’t have to think about it. You won’t forget to send your extra dollars to savings, and you won’t be tempted to spend it on that new couch.

You can do this by setting up an automatic transfer from your checking into the account where you keep your savings. This can be from checking to a savings account or checking to an investment firm like Vanguard.

If your paycheck is an auto-deposit, you may be able to set up an automatic transfer to savings from your paycheck.

So automate your savings already!

What Do Our Readers Say?

I asked my Started At 50 Facebook group to share their money-saving tips. Here are a few of their responses.

  • Always shop with a list – Ashley
  • Cut the cable – Jack
  • Use envelopes, track cash flow and net worth – Diana
  • Auto transfer savings to an account at a different bank so you don’t see it – Kristy

What Does The Bible Say

God calls us to be good stewards of everything we have. A steward is one who manages the property, finances or affairs of another. Everything we have comes from God, and He expects us to manage it well. Saving some of today’s earnings for the future is a way to manage well.

Precious treasure and oil are in a wise man’s dwelling, but a foolish man devours it.

Proverbs 21:20

Go to the ant, O sluggard; consider her ways, and be wise. Without having any chief, officer, or ruler, she prepares her bread in summer and gathers her food in harvest.

Proverbs 6:6-8

Key Takeaway – Developing the habit of saving money is the key to your financial stability. It is your SuperPower. Even if you’re not a natural saver, it is a skill you can learn.

Assignment 1 – If you have non-mortgage debt, devise a plan now to pay it off.

Assignment 2 – Check with your employer for the matching rules on your 401k and get your match.

Assignment 3 – Make a list of the short, medium and long-term items you need to save for. Then look at your spending/budget and determine how much money you can send to savings.

Coming Soon – A primer to investing

What Is Compounding And How To Harness Its Power

At A Glance – Harnessing the power of compound interest or compounding is probably THE most important factor in becoming Financially Independent.

What Is Compound Interest or Compounding

Compound Interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t… pays it.

Compound interest is the most powerful force in the universe.

Compound interest is the greatest mathematical discovery of all time.

Albert Einstein

Those are powerful quotes from a powerful mathematician! Why would Albert Einstein say that about compound interest? Because it can mean the difference between barely having enough money to get by in your retirement or being quite comfortable.

Let’s look at what compounding is and what it can do for you.

Definition of Compounding

Here’s a textbook definition of compounding. Compounding is the process in which an asset’s earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth occurs because the investment will generate earnings from both its initial principal and the accumulated earnings from preceding periods. Compounding, therefore, differs from linear growth (simple interest), where only the principal earns interest each period.

In plain English, compounding is interest on interest which magnifies returns over time.

Here’s an example. Let’s say you deposited $1,000 in a savings account and the bank will pay you 10% interest per year. (I know you can’t get 10% right now, but I’m just using round numbers).

In year One, you would earn $100 in interest (1,000*10%). Your account would then total $1100.

In year Two, your $1100 earns 10% interest or $110. Add that to your principle and you would have $1,210.

In year Three, you would earn 10% on $1210 or $121. This would total $1,331.

Each period that the interest is added to your account, it is calculated on the total amount in the account. Not just the original deposit of $1,000.

$1,000 Invested at 10% Comp. Interest per Year GainTotal
Year 1 (1,000*0.10)$100$1,100
Year 2 (1,100*0.10)$110$1,210
Year 3 (1,210*0.10)$121$1,331

Compound Vs Simple Interest

Simple interest can be defined as interest paid only on the original principal, not on the accrued interest. In other words, the interest will be calculated each period on the original deposit.

In our example above, simple interest would only be calculated on the original deposit of $1,000. So, each year the interest paid would be $100. With simple interest, at the end of 3 years, you would have $1,300.

$1,000 Invested at 10% Simple Interest per Year Gain Total
Year 1 (1,000*0.10)$100$1,100
Year 2 (1,000*0.10)$100$1,200
Year 3 (1,000*0.10)$100$1,300

Let’s look at the totals for these two examples side by side for 1, 5, 10, 20 and 40 years.

$1,000 Invested at 10% Simple Interest Compound Interest
Year 1 $1,100$1,100
Year 5$1,500$1,610
Year 10$2,000$2,594
Year 20$3,000$6,727
Year 40$5,000$45,259

You can see why compounding is described as a Mathematical Explosion! The difference is small in the beginning, but as the interest compounds over many years, the difference in your total investment is massive.

The Magic Penny

Here is a fun riddle. Would you rather have a penny that doubles every day or a million dollars? Interesting question. Let’s see…

Start of Day 1$0.01
End of Day 10.02
End of Day 20.04
End of Day 30.08
End of Day 40.16
End of Day 50.32
End of Day 60.64
End of Day 71.28
End of Day 82.56
End of Day 95.12
End of Day 1010.24
End of Day 1120.48
End of Day 1240.96
End of Day 1381.92
End of Day 14163.84
End of Day 15327.68

Which did you choose? Want to change your choice? That penny’s not looking very appealing, but let’s continue.

End of Day 16655.36
End of Day 171,310.72
End of Day 182,621.44
End of Day 195,242.88
End of Day 2010,485.76
End of Day 2120,971.52
End of Day 2241,943.04
End of Day 2383,886.08
End of Day 24167,772.16
End of Day 25335544.32
End of Day 26671,088.64
End of Day 271,342,177.28
End of Day 282,684,354.56
End of Day 295,368,702.12
End of Day 3010, 737418.24

As you can see, the effect of compounding is slow as molasses at first, but then later, takes off like a rocket! Your investments can make more money than you do. The effect of compounding on investments has been described as a perpetual money machine!

What does this mean for you? Invest early and invest often. And leave it alone. Don’t sacrifice your future for something you think you can’t live without today.

A Real-World Example

So far I’ve given you hypothetical examples in order to show you how this works. Let’s look now at a real-world example.

I’m going to use 2 people, Earl the Early Bird and Paul the Procrastinator. Earl starts saving and investing 20% of his $36,000 salary at 22 when he starts his career after college/trade school. This means he has $600/month to invest. He can invest 20% because he has not let his lifestyle creep until it takes all his income. Earl invests his money in low-cost, broad-based index funds that have returned an average of about 8%/year for the last 60 years.

Paul has graduated college with a great starting salary of $90,000/year. He has set up his life to reflect his hard work and good fortune. In other words, he has allowed his lifestyle to creep up to meet his income. He really can’t save much at first because he needs to buy a house and he has a hefty car payment. Ten years later at 32, he decides he should probably start saving for retirement. He saves and invests 10% of his salary which he feels good about. This means he is investing $750/month. Paul is putting his money into the same low-cost index funds as Earl.

Let’s see how they do at age 32, 42, 52 and 62.

EarlPaul
Age 32$111,837$0.00
Age 42358,764139,796
Age 52906,902448,455
Age 622,123,6751,133,627

Earl is only ahead of Paul by a little over $100,000 when Paul starts to invest, but ends up beating him by $1M! Even though Paul is investing more per month and has a much higher salary, the value of time was in favor of Earl.

What Does This Mean For You And What If You’re Starting Late?

The answer to this is simple, but not always easy. It means save everything you can as often as you can. You can see in the examples above that time and interest rate make a big difference in the end result. Compounding works FOR you as you grow your savings. The longer your money is invested, the more effect compounding has. Starting as early as possible will give you more time to save. Also, the rate affects the outcome of compounding. The higher the rate, the more your money will earn. As interest is added on top of interest, your money will grow faster over time.

What if you can’t save 10% or 15% of your salary? You might have money that is not working as hard for you as it should, you just need to find it. If you don’t know where to start, check out my other articles on Calculating Your Net Worth, Tracking Your Spending and Budgeting. These should give you a place to start looking for extra money to save.

What if you’re not 22?!!! I feel your pain. Remember the name of my website…Started At 50. That’s because I was 50 years old when I started saving. Literally, my Net Worth was Zero at age 50. If you are late to the game, first you need to know it’s not TOO late. You have time, just not as much time. Start saving everything you can get your hands on NOW. Don’t wait another day. Everything you can do today will make your future more comfortable and less stressful.

Can Compounding Work Against Me

Compounding can also work AGAINST you. The same power that allows your investments to grow will also cause your debt to march relentlessly upward. Some types of debt like credit card debt are calculated with compounding interest and not simple interest. As your credit card balance grows with purchases, the interest on interest calculation causes the balance to grow even faster.

If you do not pay your credit card bills in full every month, you are paying the bank a huge premium for the privilege of carrying their card. At the time of this writing, interest rates on savings accounts are below 1% per year, whereas credit card rates are anywhere from 16-30%. The first step in boosting your savings rate is to pay off your credit cards!

Credit cards are not the only type of loan that is calculated with compound interest. If you have other types of loans, check to see what kind of interest they carry.

Where Can I Find Compounding?

Compounding happens in several places. The most obvious would be at your bank with a savings account or CD. Usually, the bank guarantees a rate of interest for a period of time. Unfortunately, interest rates are very low right now (March 2021) and have been for a while.

Compounding also happens in the stock market. Investment vehicles such as mutual funds, stocks, bonds, and T-bills are some examples. The compounding happens when interest and dividends are paid and with increases in the share price. (You must remember the stock market will go up and down on any given day, month or year. The point is over time, stocks go up)

The way to ensure you enjoy the effects of compounding is to leave your interest and dividends in the account to compound into the future.

Conclusion

Compounding is a force you want working for you and not against you. This means saving early and often. It also means pay off your credit cards.

Here’s another quote for you. This time from Warren Buffet.

My wealth has come from a combination of living in America, some lucky genes, and compound interest.

Key Takeaway – Harnessing the power of compounding is probably THE most important factor in becoming Financially Independent. Save early and save often.

Assignment 1 – Look at how much you are saving today. Can it be increased?

Assignment 2 – Are you carrying a balance on your credit cards? Look at their current interest rate. Try to reduce the rate or pay it off. (Here is an article about paying your credit cards off)

Coming Soon – How credit card debt can get out of control.

Benefits Of Using a Budget

In a previous post titled How To Do A Budget, I showed you the How of doing a budget. How to identify what categories need to be included, the basic math used and a spreadsheet to start creating your own budget. You can use this spreadsheet, a pencil and paper, or one of several apps for budgeting. Some of the more popular are YNAB, Mint, and Every Dollar.

This post talks about the Why of Budgeting. A budget is just a list of categories with math behind it, but the emotions and decisions that are wrapped up in putting together your first budget can be overwhelming. This post will help you work through your own Why as you wrestle with these concepts.

Budgeting can be a scary word. Many people approach budgets with fear, especially if they don’t have much experience with them. But budgeting does not mean you will have to start scrimping and living like a miser. It just means you understand your finances and have control over them.

It’s stressful not knowing what money is coming in, what’s going out and what our obligations are. No matter how big our checking account is, we can feel stressed.

Budgeting is creating a plan to help you get your finances where you want them to be. A budget is the ideal way to get an understanding of the way you spend, the way you save and then identify ways to improve. A budget also helps define your values. Look at where you spend your money. Does that align with your goals and values? If not, changes can be made.

9 Benefits of Budgeting

(1) Gives You a Framework for Money Conversations:

There was a time in my marriage when money conversations almost always fell off the cliff into the abyss of arguing, pain, and indecision. We couldn’t agree and the conversations led us nowhere. I talk about this in the post Being on the Same Page With Your Spouse.

If you’re married, don’t start the conversation by talking about money. Start by talking about your WHY. Talk about your wants, dreams, and goals. Why are you saving , why would you care about how much you’re spending? Will it relieve stress in you life and your relationship? Will it allow you to go on that vacations you’ve been dreaming of? What’s your WHY?

After you’ve had a few of these conversations, THEN you can talk about money. Working on your budget together can become the basis for many interesting and productive money conversations. Make the decisions together. Compromise together. No matter where you are starting…have patience with each other.

(2) Provides Control Over Your Money:

You have total control over where you spend your money. If you choose to spend money on A, then you may not have as much for B. If you want a latte three times a week, put it in the budget. If getting a babysitter once a month is important, put it in the budget. If there’s not room for those discretionary items, cut back somewhere else.

What if there’s not room for any of those things? If your finances are a dumpster fire, cut everything you can! Just remember, it won’t be like this forever. There was a time when I told my kids, “If you can’t eat it, we’re not buying it.” These times were not pleasant, but they were temporary. We dug ourselves out and you can, too!

(3) Let’s You Track Your Financial Goals – Saving, Long-Term Spending, and The Emergency Fund:

A budget will not only help you plan for this week and this month, but it will also help you with long-term goals. Do you want to take a big vacation in five years? Will you need a roof or major car repair next year? Do you need to beef up your Emergency Fund? A budget can help you find and accumulate cash for these kinds of issues.

(4) Budgeting Will Open Your Eyes. It Helps Shed Light on Bad Spending Habits:

Do you get to the end of the month and think, “Where did all my paycheck go?!” Does it feels like it disappeared? Once you really start looking at your spending, you will be able to identify where it’s going.

You may have large medical bills that you just have to gut through till they’re paid. Or you may find that you’ve got some bad spending habits that need to be reigned in, like going to the drive-thru too often or all those Amazon boxes! How about bank fees? If you are paying the bank for overdraft fees, this needs to stop now!

(5) Helps Create a Cushion for Unexpected Expenses – Emergency Fund:

Do you have an emergency fund? If not, you need to start working on that today. We all have emergencies! No one is exempt. For some people, a flat tire or car repair is a real emergency. An illness or a broken heater can be financially devastating.

The lack of an emergency fund is what caused most of mine and Stephen’s financial hardships earlier in life. “Stuff” happened and we had no safety net.

Could you cover a $500 emergency without going into debt? $1000? $5000? How about a job layoff? You need 3-6 months of living expenses in an emergency fund. This needs to be kept in an easily accessible place. But not too easy. A savings account or money market fund will do nicely for now. Remember, this is not a new couch fund!

(6) Helps Identify Money for Paying Down Debt:

If you are paying down debt like credit card or student loan debt, a budget will help you identify cash you can send toward that debt. Any extra cash you can use to pay down debt will get rid of it sooner and save you money in interest payments. If you’re having trouble making your minimum payments…see dumpster fire above!

(7) Helps Identify Money for Investing:

If your Emergency Fund is in place and you are paying on your debt, you may be able to identify some extra cash to start investing. If you can identify money to invest, I would start with your employer’s 401k and get the match. I will talk more about investing in a future blog post, but for now, do everything you can to get your employer’s match if you have one. Don’t turn down free money!

(8) Helps Ensure You Don’t Spend Money You Don’t Have:

You may be in a place where you are spending more money than you make. Stephen and I did that for a while when he had no income. It felt terrible! We were living on credit cards and digging a bigger hole with our debt every day. Again, this is a dumpster fire. You may not realize you are doing this. One reason would be because this is “normal” in our culture. A budget can help you identify the problem when more money is going out than coming in.

(9) Helps Keep Your Eyes on the Prize (Motivation):

After Stephen and I put out our dumpster fire and got on track with a budget, it helped to keep us motivated. If you’re paying down debt or just starting to invest, the numbers don’t seem to change very quickly. It takes some time to get traction. The budget helped us to “Keep Our Eyes on the Prize!”

Assignment 1 – Evaluate your budget WHY. Where do you find yourself with your money right now? Are you in a dumpster fire or are you ready to start investing?

Assignment 2 – If you haven’t done a budget yet, start working on you first draft. There is a spreadsheet template in Personal Finance Basics Part 3: Let’s Do A Budget.

Key Takeaway – A budget is the ideal way to get an understanding of the way you spend, the way you save, and then identify ways to improve. A budget also helps define your values. Look at where you spend your money. Does that align with your goals and values?