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Start Saving Immediately

March 20, 2015
Throughout the world of personal finance, one of the most common pieces of advice is to pay yourself first. It is very old advice, and yet it still holds true to this day. What this phrase really means is pay your future self by putting money into savings before paying any other expenses.
 
Since almost all financial advisors and blogs suggest paying yourself first, we know that it has to be important. But why?

What is the purpose?
We have to have a reason for setting aside a portion of our hard earned money rather than spending it as we please. The goal is to start saving for large expenses and building reserves for unanticipated situations. Retirement, education, vehicles and a home are some of those large expenses that can usually be anticipated well before incurring the cost. And it takes time to save enough to be able to afford these items, even when using a loan to do so. Cars breaking down, medical emergencies and loss of employment can crop up in an instant and wipe you out financially if you are not prepared.

 
With reserves built up and savings at the top of our list, we can be prepared for these expenses whether anticipated or not. I promise you that the peace of mind will be well worth putting off some of those impulse purchases. Just imagine having a decent amount of fall-back savings sitting in the bank in case anything were to come up unexpectedly. Paying yourself first is a way to de-stress your life and reduce your worries or fears.
 

How much should you pay yourself?
So this all begs the question of how much money to set aside. The true response would be that you should set aside as much as you are comfortably able to. Set aside as much as possible while still being able to cover your other expenses (and still being able to treat yourself every now and again).

 
A general rule of thumb is to pay yourself 10% first.
 
However, if you are not able to afford putting away 10% right now, that is o.k. But do not let the excuse that you cannot afford to save stop you from putting something away. Start today. Start right now. Even if it is only $100 a month. Every little bit helps and will eventually get you to improved financial stability.
 
Why is it so smart?
This will set money aside before anything else has a chance to take over your bank account. Putting it off until later means you will likely find other ways to spend the money. That fancy new tv, eating out every night, a clothes shopping spree, the bottomless pit that is home improvement... It is much more tangible to focus on the immediate gratification of impulse buying than saving the money for the somewhat ethereal idea of your future self. Note that this is also what makes debt such a tantalizing prospect: make your future self pay (and at a price premium no less) so that you can enjoy it now. Because it is so easy to discount your future, setting some aside immediately upon getting paid will make it so much easier to play with the end goal in sight.
 

Where you put the money that you save is another beast all together. There are a variety of savings vehicles that will help put your money to work for you. You can look forward to some future posts that address this. For now just make sure that the savings are put somewhere that is a little more difficult to access. Even a simple barrier to access can be effective, i.e. putting it into a savings account instead of checking.

It is best to have at least 6 - 12 months worth of living expenses set aside as cash savings. This can be at the bank and does not have to be rolled up and hidden inside your mattress. It just needs to be easily accessible, or what is known as a liquid asset.

After you have enough funds set aside to cover emergency living expenses, the money you continue to set aside each month can go into other types of saving vehicles. CD's, bonds, 401K's, real estate... there are a lot of places where this money can be saved and put to work earning you more money. As I said before, there are too many to be covered in this article. Know that you just need to keep setting money aside to be there for emergencies and to prepare for big expenses and retirement.

Start right now. Go into your bank's mobile app and transfer $100 from checking into savings. Go ahead, I'll wait.

Great! Don't you feel better already? Keep it up and your money will be able to take on whatever comes your way. 

  Saving
  Tags save money pay yourself how to save money how much should i save

First Rule of Personal Finance

March 18, 2015

Financial Freedom in a Simple Rule

If you were only to ever take one piece of financial advice in your life, this first rule of personal finance should be it. In fact if you could only ever remember one thing about money, forget everything else and commit this to memory:

Live on less than you earn.

So basic, so pithy. And yet it is powerful enough to completely change your financial future. Not following the advice in this simple rule of personal finance can lead to living paycheck to paycheck, getting deeper and deeper into debt, always being one step behind and never saving for the future. 

So now the real question is how do you live on less than you earn?

The rule can be broken down further into two different portions that give us the explanation on how to implement:

  • Live on less
  • Earn more

Live on Less

You have to know what your money is being spent on. Without knowing where your hard earned income is going, you have no way of knowing what you can do to reign it in and bring it below you monthly income. Unconsciously spending your money in this way means it is gone before you know it and you no longer have money to set aside for the future. So the first step is tracking your expenses.

After you begin tracking where your money is ending up each month, you will begin to see patterns and recognize areas you may be able to cut back or remove altogether. There are certainly some fixed costs that cannot be avoided like housing  and debt payments. And some costs that cannot be avoided but can vary from month to month like food. It usually helps to break things out into needs vs wants. Ask yourself whether the item in question is an absolute essential or if it is a want that can be foregone or pared back.

Once you have tracked your expenses and compared necessities to luxuries, you can start to cut back on those things that you can do without. Or you can find other creative ways to be frugal like using coupons, shopping around for certain purchases or getting in touch with your do-it-yourself side. The main goal here is to give yourself a little room in your finances to begin saving money.

Earn More

Find different ways to increase your monthly income. This can range from asking for a raise at work to looking for a new position to starting your own website to doing odd jobs on the side. Whatever works for your situation is what you should pursue. Even starting off small and getting just a few extra bucks a month will help. As you continue to keep an eye out for new income opportunities there are bound to be some that fit your schedule and abilities.

That being said, you do not want to devote all of your time, resources and efforts to earning more. There is much more to life than this and many other activities should fill your days. At the end of your life you do not want to look back and only see an endless string of trying to earn more and more money. Just get yourself to a point where you are living comfortably and saving for your future, then you can stop worrying about your finances and enjoy life to the fullest.

Rinse, Wash, Repeat

Living on less than you earn will help to put your personal finances on track for success. Do this by spending less and finding ways to increase your income. This will give you the ability to save, pay off debts and take on those unanticipated expenses without any problem.

Repeat this cycle of evaluating your expenses and examining your income on a regular basis. It will bring financial freedom, you can count on it.
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  Personal Finance

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