With the previous post, MoneyEnergy acknowledged that it’s time to come to terms with getting frugal. Usually I prefer to focus on growing income and cashflow rather than cutting back on expenses. I’m a graduate student. I don’t even own a bike, pet, TV or a car – how can I be expected to cut back even further, right? Well, I do buy my daily latte (actually, it’s not a latte, it’s cheaper! – so I’ve got a major tip for you latte lovers here), and I eat away from home frequently since I’m on campus so much. But those who know me comment on how modestly I’m already living. I live so modestly that at my undergrad college I didn’t even qualify for a bursary because I didn’t spend enough money!! So is it possible for me to save any more money? If you know you’re already broke, is it possible to spend even less?
When you see a penny on the ground, do you get excited? Do you pick it up? (OK, neither do I… ) What about a nickel? I’d pick a nickel up for sure.
There’s a Chinese proverb that says something like this: When is the best time to plant a tree? 20 years ago. When is the second best time to plant a tree? Right now! This applies to all areas of our finances, and probably other areas of our lives, too. So what if you blew $500 on clothes yesterday without even thinking about it, or $200 at CVS or Shoppers Drug Mart when you only went in to pick up some toothpaste. Just forget about your mistake and start saving money now.
In my opinion, there are four key elements required in any real, stable long-term savings plan.
(1) Knowing when not to spend money. This is where the discipline comes in (see, too, my post on frugal tips for poor people). This is where you need to remember, when you’re walking past Starbucks, that your higher self really doesn’t want you to buy a second cup of coffee today.
(2) Knowing your savings needs and having several savings accounts. In order to never wind up in the position of having to dip into some fund against your will, you need to correctly determine ahead of time, as much as possible, all the sorts of things you’ll need money for. Start individual accounts for each of them now. Have a “fun fund,” a “travel fund,” a “dire-emergency” fund, etc. Basically, this part is all about knowing your “why” as Tony Robbins would say. Your PURPOSE: why are you saving? Part of the answer should be for a big goal that motivates you, a long-term vision.
(3) Putting your money in the right savings account. You need to prioritize your many savings accounts. Make a plan for funding these accounts, and don’t go overboard saving for a downpayment when you know you’re going to need to buy a car first, etc. It might only be realistic to start saving 1% of your current paycheck for that future downpayment. If a more pressing savings need is next year’s tuition, then allot that 5% of your paycheck, or 10%, depending on the need. You also need to choose the right savings vehicle. Maybe a DRIP (dividend reinvestment plan) is right for one of your accounts. You can also use dividends to help set up an emergency fund.
(4) Knowing when to spend your savings. This means knowing what a real emergency or contingency is. Just like with investing, you need to have an exit plan. Is an unexpected friend’s wedding a good reason for dipping into your short-term savings? What about a school trip for your son/daughter? If you have set aside a fund that includes these sorts of things, then yes. You can see that the more you plan, the easier it will be to make spending decisions. If you only have a “savings fund,” undefined, then any and every unexpected “want” and “need” is going to bug you to dip into it.
There are others in the blogoverse much more expert on frugality and savings plans than I (check out the great budgeting tips over at Financial Nut). How does this stack up, guys/gals? An entire post could be dedicated to each point, of course. But I think these are the basics. In my previous post, I showed how even those on really low incomes could save some extra dollars, as hard as it is. The plan here is about what to do with those “extra” dollars you’ve saved.
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{ 6 comments… read them below or add one }
Great post! Just curious, where do you put all of your different savings accounts? Are they all at one institution? Do you use automatic withdrawals?
Hi Steve, some folks think it’s easier and simpler if all accounts are kept at one institution. For the most part I agree, and do keep a bulk of mine at one – but there’s also the question of diversification – so I do have a couple of accounts at other institutions. At this point it doesn’t add much complexity. So just go with what works for you. For US investors, it may actually have been a good thing to keep money in different banks over the last year…
For me when I was deep in debt, I used to get all pumped up when i paid my balance in full but right away i spent money.
The reason I spent money was that I was trying to like buy into get rich quick methods and instead i should have been working on disciplining myself to not spend money on what i don’t need.
Good suggestions. Larry Winget has a good book on this topic: You’re Broke Because You Want to Be.
I pick up pennies…I know, I have issues :)
The Almost Millonaire – Don’t feel bad. I pick them up all the time if I see them. As long as they don’t have something gross on them, I’ll pick it up.