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.
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.
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.
Coming Soon – A primer to investing