New Year’s Resolution 2 – How to save money by paying yourself first using auto-pay

There are two types of “saving money”:  saving towards a goal which we will discuss here and avoid paying full price which we will discuss as resolution 4.  You will never have a shortage of goals to save for whether short-term like a wedding or vacation or long-term like retirement.  So let’s discuss how to make these achievable even when you have debts to pay off.

Saving should not be something that may happen if there is any money left over, something that you will get to in the future when you have a chance, or something you promise yourself after the next raise.  Saving is not a wish for the future — your future depends upon saving now.  You need to take charge of your own future by planning for it now.  No one else is going to do this for you.  This means setting goals, making plans, and prioritizing savings equal to any of your other “needs” and ahead of your “wants”.

How to save money  – Savings Goals and Priorities

First set your savings goals and priorities.  Consider these:

  1. Retirement – You should begin saving for retirement with your very first full-time pay check.  Even small amounts now will compound into sizeable sums over long periods.  If your employer offers a 401(k) account, contribute at least enough to get your company’s “matching amount” – do NOT throw away that FREE    money.  If no 401(k) is offered, then setup your own IRA.
  2. Emergency Fund – Start setting aside at least something for an emergency fund with your first pay check, even a small amount.  It may take a while to save 3-6 months expenses, but peace of mind comes immediately from knowing you are at least partly prepared for emergencies such as a car repair, security deposit, accident, or loss of a job.  If you are paying off credit cards, then aim for 2-3 months expenses.
  3. Credit Cards — Pay off credit cards as quickly as you can.  ALWAYS pay more than the minimum.  Paying 10-20% interest makes meeting all your other goals much more difficult.  Paying off credit cards and living within your means, makes other financial goals easier.
  4. College fund – As soon as a child is born, start a college fund.  You may shift the amount up or down over the years as other needs compete, but always save something each month, even $25.  The money you save early compounds longest and best.
  5. Wants – The first four goals are NECESSITIES.  After those can come your next priority for something you WANT like a car, home, vacation, etc.  Even if you move up the priority of a WANT goal, you should still be making at least minimum savings towards your NECESSITY goals.

 How to save money  – Savings Tips

Yes I know that it’s not so easy meeting several savings goals AND debts, so here are things to make it easier.

1.     Pay yourself first – This means set aside money for your savings goals first BEFORE you have a chance to spend it.  Don’t determine what you can save after you have paid all your bills — determine what you can afford to spend after you have set aside for your savings goals.  If spending comes first, you will never have much left for savings — if savings come first, you will soon learn to adjust your spending to fit the income that is left.

2.     Auto pay – The easiest way to ensure you pay yourself first is to automatically move your savings into a separate account before you ever get a chance to see or spend it in your checking account.  Your paycheck should be going electronically directly into your checking account.  Many employers will also let you send money to one or more other financial accounts.  If not, then you can set up an automatic transfer of savings from your checking account to a financial account dedicated to each of your savings goals.

3.  Auto pay at least a minimum amount towards your savings goals – Circumstances and priorities change and so will your savings contributions, but always save at least something towards each goal.  $25-$50 is better than $0.

4.     Bank Your Raises and Other Windfalls – At least half of every raise should go towards your various savings goals and debts.  Save at least half the raise BEFORE you get used to spending it and you won’t even miss it.  Once your credit cards are paid off, save at least half of any windfalls such as tax returns, bonuses, inheritances, and jackpots.

5.     Shift spending to savings – Look for lower priority “wants” and shift savings to higher priority “needs”.  Call this belt-tightening, trimming the fat, or reducing your “latte” spending – there is always fat if you look.  This can be from many $5 coffees and muffins to a one-time shift to cheaper insurance, phone, TV, or other bills.

 

How to save money  – Saving Psychology

Saving is easier when you know tips to make it easier and where to look for the fat, but there is still the problem of will power.  Even with our good intentions, how do our impulses trip us up?  Instant gratification can trip us up, even when part of the brain is trying to tell us that this purchase is going to cost our credit card 18% more in interest.  Here are some tips for helping to get our emotional side of the brain on board with the program our rational side of the brain is trying to yell at us.

·      Know the difference between “needs” and “wants”.  If it is merely a “want”, think about how much do you really want it or how many times will you actually use it.

·      Drastically limit impulse spending by how often you do it and how expensive is the item.  Especially for expensive items and items not on sale, think about it overnight; you will be surprised how little you want it the next day.  At least comparison shop for a sale.

·      Pay cash instead of using a debit or credit card.  Studies show that it’s easier to limit spending when we actually see real cash leaving our hand.

·      Have specific goals for your financial future like paying off credit cards, saving for a house, going on a cruise, etc., and think about how impulse and “habit” spending is impeding those goals.

·      Compare a purchase to a higher priority goal and think whether it is worth delaying that goal.

·      Reward yourself when you reach a savings goal.  For example, every time you pay off a nasty credit card balance, go for ice cream or a movie.

·      Pay a penalty when you fail to reach a savings goal.  For example, make a donation to the political party or cause you dislike.

 How to save money – Websites and Apps

·      http://savedplus.com/ – This smartphone app provides a new twist on automating your savings.  It automatically transfers to your savings account a percentage of any spending you do from your checking account.  Just link your checking and savings accounts, set up your saving goals and percentages, and watch your savings grow.

·      http://www.mvelopes.com/ – There are many websites and apps for budgeting and I’m going to highlight many of them later.  This one is good for the “envelope” method of curbing spending by putting money you need in different envelopes to keep it separate from other money and not spending more when the envelopes are empty.

 

One thought on “New Year’s Resolution 2 – How to save money by paying yourself first using auto-pay

  1. Pingback: New Year's Resolutions for 2018 Managing your money » Financial Guide to Life

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