There are two types of ways to “save money” – one is to not spend it in the first place, and the other is to put it away in a strategic manner so it will be there for you later, either for a big purchase or for retirement. We often talk about the first type of saving, but today we’ll talk about the second.
First Things First
Before jumping in to the smart habits that will help you save money wisely, there are two things you should have.
1. A budget
2. Insurance coverage for auto, health, home (or renter’s), long-term care, and life
Why? You need a budget so you know exactly what every dollar you earn is going to do for you, and you need insurance because a single accident or illness could devastate you and your family without it. Having both will help you on your financial journey.
Smart Money-Saving Habit #1: Look At Your Finances Regularly
Don’t bury your head in the sand most of the year only to take a peek at your finances around tax time. It can be unpleasant to look at the reality of your financial situation, especially if your savings are $0 and you’ve got a lot of debt, but it’s the first, crucial step to take in order to save money wisely.
This step also involves creating and sticking to a financial plan. This plan is like a road map that shows you where to go and how to get there. If the ultimate goal is having enough to live on (comfortably) at retirement, then to get there you may want to pay off credit card and other unsecured debt, save up a liquid money cushion for emergencies, contribute to retirement accounts, and invest in stocks and bonds. There are a lot of options and if you decide to just wing it month to month, you’ll have a hard time growing your wealth. That’s why you’ve got to have a plan.*
Smart Money-Saving Habit #2: Pay In Cash
Credit cards and debit cards have a lot going for them, including convenience, built-in safety features, and, with some cards, sweet perks like points and miles. But cash has its upsides, too: it’s harder to spend, psychologically. Studies have shown that people tend to spend less when paying in cash, so this simple switch alone could have a noticeable impact on your wallet.
Smart Money-Saving Habit #3: Ask Yourself This Question Before You Buy
“Do I really need to spend money on this right now?” That should be the question you ask yourself before purchasing something that’s not explicitly in your budget. Ask yourself, is it a want or a need? If it’s a want, is having that product or service more important than putting that money towards reducing debt or saving for retirement? Sometimes the answer will be “yes,” and other times “no.” You may even want to institute a 24-hour waiting policy. If you still want to make the purchase, go for it.
Smart Money-Saving Habit #4: Make Saving Regular
It’s so tempting to wait until “one day” when you have “enough” money to start saving for retirement. However, it’s likely that as your income increases from raises, promotions, and career advancements, your spending will increase, too. So that mythical day where you spend as much as you do now but have a lot more money is probably not going to materialize. Meaning you’ve got to get into the habit of regularly putting money aside for the future starting now, no matter what kind of income you’ve got. Jack Benny put it well when he said “Try to save something while your salary is small; it’s impossible to save after you begin to earn more.”
(Check out other inspirational money saving quotes here.)
Smart Money-Saving Habit #5: Make Saving Automatic
Arrange to have money taken automatically from your checking account or even your paycheck and put directly into your IRA, 401(k) or other retirement account. It’s not only easier, it also hurts less, as you never really “see” that money.
Smart Money-Saving Habit #6: Make the Max Contributions
Put the maximum amount into your retirement accounts each year if possible. (For 2016, those limits are $18,000 for 401(k) plans and $5,500 for IRAs.) If you can’t contribute the max, put in what you can.
Smart Money-Saving Habit #7: Think Ahead – Far Ahead
You can’t predict the future perfectly but you can predict that certain expenses are likely to come up, like a home, a car, kids’ college, and retirement.
Start planning for these expenses now.
Keep contributing to your retirement plans. Sock away money for cash down payments on houses and cars (or pay for cars entirely in cash). Open an education savings plan like a 529 plan to pay for your kids’ tuition. Not a parent yet? Doesn’t matter. You can still open and contribute to a plan even if you don’t have a child. Youll just be even further ahead.
Bonus Habit: Be Okay With Taking Small Steps
Advice is easy to give but hard to implement, and that seems to be especially true when it comes to finances. But don’t get overwhelmed. It’s okay to start small. Maybe you can’t get rid of all your credit card debt, but you can pay off one card. Maybe you can’t contribute the full $5,500 to your IRA this year, but you can put in $600 (just $50 per month), which will yield just under $40,000 in 30 years at 5%.
To save money wisely, you’ve got to build smart habits, and building habits takes time. So be patient. Just remember, every step in the right direction is good, no matter how small it is. Just keep going!
*Qooton is not a financial planning site and is not intended to address your specific financial situation. Please speak with a financial planner or financial advisor about what’s right for you!