If you’ve been trying to save more money but haven’t been as successful as you think you should, don’t worry. The following post should help you get on the right path lickety-split. Let’s stop beating around the bush and get right to it Pilgrim.
1. Understand The Power Of Time
Time is the most precious asset you have and it’s important to understand how really powerful it is. Look at the chart below. It illustrates the results of what happens based on two different savings scenarios. Amy starts saving as soon as she graduates college. She didn’t have any student debt to worry about so she’s got cash to put to work. Lets assume she can earn 5% on the balanced fund she adds to in her retirement account. She saves $500 a month until she retires at 65 with $905k – cool beans.
Scenario two describes what happens to Sam. When he graduated from college he had to pay back student loans. He ultimately follows Amy’s savings plan but only starts doing so when he reaches age 32. He ends up with $502k. That’s not bad of course but had he been able to start saving right out of school he’d be far better off.
When you are young it’s only natural to feel like you have all the time in the world. And hopefully, you have a long life ahead and lots of time. But since time is the most precious asset there is, it’s important not to waste that treasure.
If you’ve been hemming and hawing about putting your savings plan to action, first understand how truly expensive procrastination is. Hopefully that will give you the motivation (i.e. kick in the arse) you need to get going.
It’s pretty normal for people to have competing financial goals. If you need to save up for a car, house and retirement, what do you do first? All things being equal, you should probably put money aside each month for all three goals. But chances are you don’t have an “all things being equal life”. At different times in your life you will have different priorities. Your specific situation will dictate what to do. However, I do have some general advice here:
- Keep your transportation costs as low as possible.
- Keep your housing costs very reasonable
- Identify the amount you have to save for your retirement and make that a priority.
Again, there will be times when it will be impossible to achieve that kind of balance. But that is a good target to shoot for.
By having your priorities straight it will be easier to breathe life into your savings program. Without clarity it’s too easy to just throw in the towel.
If you want to free up money for your savings plan, start off by knowing where that money is going to come from. The best way to do that is by tracking where the money is going now. Once you identify things you spend money that aren’t really a priority, it will be easier for you to cut there and earmark funds for your savings goals.
This is the fun part. You understand how important it is to kick up your savings. You’ve identified how much you want to save. And you’ve pinpointed where the money is going to come from. Now all you have to do is automate the savings by setting up a monthly draft from your checking account into your investment account.
This is easy and very smart. Once you set up automatic drafts you don’t have to think about this ever again. But you’ll feel empowered every time that payment goes out and your investment account grows.
When I work with clients, I suggest that the start small and work their way up. In other words, if you think you can save $500 a month – start with $250 and reevaluate after a few months. It’s really cool to build on success rather than struggle with failure.
Do you think these ideas would be useful to help kick start your savings plan? What other tactics might work?