The following staff post is by Miss T.
Do you spend everything you earn?
Yes?
saving and spending (Photo credit: 401(K) 2012)
Then you have something in common with the majority of people. Most people spend every cent of their income and have made no provision for saving. Household saving rates fell below the one percent mark in 2007 in the US and are still among the lowest in the world.
Failure to save really does lead to financial disaster and is one of the major reasons why people struggle to survive. Each person has a choice about how they live their life; it is vital to make saving a top priority.
No one can predict the future; we never really know what’s around the corner and down life’s road. It could be that everything will be rosy but that is really an unrealistic expectation. Financial difficulties happen to nearly everyone on the planet at some stage; the best we can do is take action to limit the effect.
So if having some savings is so important, why do so few people have any? We live in a consumer-driven society, constantly being tempted in every type of media to buy the biggest, the latest and the best. Is it any wonder so many people are guilty of over-spending and under-saving?
Do you worry about being able to pay your bills? Do you get to the end of a pay period and wonder where all the money went? Do you suffer anxiety, stress or lose sleep over your finances?
Let’s look at how saving part of every pay check will ease these worries and allow you to get some sleep at night.
If you lost your job or were unable to work for a while, how long would you be able to manage? The majority of people admit that they would be lucky to have enough money to last a month in this situation. No wonder stress is affecting so many people!
The #1 rule of financial security is to always put some money aside as savings from every pay check. Think of this as paying yourself and always pay yourself first. The easiest way to do this is arrange to have your savings amount automatically transferred to a savings account each pay day. What you never see, you won’t miss but you will have the peace of mind that comes with having some back-up funds.
Now, this amount you’re saving is not for retirement; you need to have specific retirement account for this. Neither are these savings your emergency fund; that should be a separate account to pay your living expenses in case of an emergency. While you need both retirement and emergency accounts your priority should be to save enough as a back-up for when bills come in and life’s little unexpected surprises occur.
“How can I save anything when there’s never any money left over!”
Ever heard yourself saying this? It’s the most common reason people give for not having any savings.
When you create a budget, you will know how much money there is for everything you need to pay for. If there’s not enough to go around, you either need to earn more money or cut back in spending somewhere. These are the only two choices you have; relying on credit to make it through the month is definitely not an option. This is where so many people fail; they use credit cards to try and make ends meet but this practice only gets them deeper and deeper in debt.
So, savings becomes one of your expenses in your budget but an expense you will be glad to have. You will also be saving the amount you need to put aside from every pay check for occasional bills and expenditures like annual insurances, vehicle expenses, gift buying, home maintenance etc. A well-planned budget drastically reduces the risk of financial problems and worry. When you know everything is accounted for, worry is taken out of the equation.
Saving towards a goal is a great way of getting results. If you have a plan, you will be more motivated to do whatever it takes to achieve the goal. Open a separate savings account for holidays, a new car, a new kitchen or whatever you want.
Controlling spending is the other side of the coin in creating savings. With so many people living from pay day to pay day, this is often the only way to find money for savings. It is often the little things, the frivolous things, that eat away at our money. It is important to identify the things you need, from the things you want or would like to have. It is in the area of spending on ‘wants’ that savings can usually be found.
Sometimes, the decisions we need to make, in order to be able to save, will be difficult ones. When people have become accustomed to a certain way of living, making changes can be hard. If you are severely over-stretched, you might need to consider down-sizing your home and car or moving to a cheaper area. But it’s better to make those tough decisions before your financial situation gets any worse.
Having a back-up of savings helps reduce financial stress and gives a cushion against financial disaster.
So, do you have a back up plan?
Miss T is indeed wise. Without savings, it’s only a matter of time before a person is sucked into the high-interest debt trap. More like a tar pit than a trap–once you’re in, it’s very tough to get out because of interest.
I like the point made about stress too. I’ve found for most there’s hardly a better stress reliever than a healthy emergency fund!
It is like tar. I myself was in debt and the interest made it almost impossible to get out of. I did though figure out a way. And yes, having your finances in order and a back up plan definitely helps with stress.
I agree with you Miss T. It is necessary to come up with a good budget. People often make the mistake of spending all of their money and not saving enough or even not saving at all for emergencies.
I feel this stems from people not having a grasp at what things cost and how much money they have coming in and out. Awareness is the first step.
People don’t really understand the value of savings. To often people will think savings relates to saving up for something. Like why should I have 2k in the bank if I am not saving to buy a TV, car or something. Whats worse then not saving is spending way more then you even make or have which happens just as much as people not saving in the first place.
It’s true. People like to quantify things. They want to have a purpose for everything. Savings without a product attached doesn’t feel natural.
You nailed it Miss T, the key here is to put money away before it enters your spending account. Over the months, even $100 per months will grow into a sizeable amount that may come in handy when facing unexpected events!
I find this really helps with managing temptation. What you don’t see you don’t think about.
” ‘How can I save anything when there’s never any money left over!’
Ever heard yourself saying this? It’s the most common reason people give for not having any savings.”
http://groups.csail.mit.edu/mac/users/rauch/worktime/
It’s true. I have heard numerous people say that they have no money to save.
Do you spend everything you earn?
Nope 🙂
Good post Miss T. However, in our age of easy money and credit, there are no incentives to save. Nobody wants you to!
The desire to be financially responsible has to come from within, and it will only get worse over time for our society I suspect.
Mark
You are so right. There aren’t incentives to save anymore. It seems like there are so many creditors and debt consolidation options these days that people feel like no matter what happens they can be bailed out.
@My Own Advisor “there are no incentives to save. Nobody wants you to!”
I agree that credit card companies, stores, etc. don’t want to you to save. But, some people really do care about helping you save. Its just about finding a company that has their interests aligned with your best interest: saving more. There are a few startups out there (in the US) that are trying to do just that. SmartyPig, Impulsesave, and getsavi.com are some options.
*Full disclosure, I am involved with getsavi.com
Saving is essential for every family to stay out of debt. I agree with you that a family must have a fund to face the future emergencies.
It is the only way to actually be prepared if you ask me. I think we should have a back up plan for everything in life.
I can think of at least a couple multi-thousand dollar “surprises” that have snuck up in just the past 15 years of my “real adult life”. By not having some cash set aside for home repairs, car repairs, other surprises life throws at you, you’re going to end up being forced into some really bad choices.
I would totally agree. I too have had many things sneak up on me and when I was younger they really did cause detriment. I wasn’t good with my money back then and didn’t have a cushion saved. I have definitely learned my lesson.
Great post and so refreshing to see your remark on Credit / credit cards – not relying on it – as it will only get you deeper and deeper in debt. In a bid to get my finances in control, I chopped up my credit cards, as sometimes removing temptation is the only way, and years on I definitely dont miss or need them.
I did the same thing years ago. Sometimes we need to show ourselves some tough love.
Paying yourself first and foremost is so important. Great post ! I used to be one of these people but now I literally can’t imagine finding things to spend my entire income on.
I used to one of these people too and boy a I glad I cleaned up my act at a young enough age to recover. I am glad you did too. We are much better off for it.
Money saving tips suggested by Miss T are useful and effective as well. I am following some tips like “Saving towards a goal is a great way of getting results. ” and “Controlling spending is the other side of the coin in creating savings “. Thanks Miss T to share such good tips with us.
You are welcome. I am glad you found them helpful. What goals are you working towards? I hope your progress is going well.
My goal is to save at least $100 each month for some external expenses, like tour to near cities from my home town, give parties to friends and relatives. However, I use this saved money when it needed.
Sounds like a good plan. You can always increase the amount you save as needs change.
This is so simple yet profound for anyone seeking financial peace. I believe in saving 30-50%(may be extreme for most people) only because I don’t have the crystal ball. It’s amazing that we buy insurance by force(for example, car insurance), but we refuse to insure our future.
Well said. I like your analogy of insurance. That makes total sense. Saving is our insurance. Love it.
Good article. The message is obvious but not followed in reality.
Saving is the first step to financial security/freedom, which you have covered in detail. If this step is ignored it becomes a stumbling block which prevents progress and erodes your wealth. Most people who live from pay check to pay check are actually ignoring their financial health, which is dangerous.
Secondly, there are good savers who are intelligent and smart at saving. But it shouldn’t end there, instead the surplus cash should be wisely invested in stocks, bonds or other assets to create more income or wealth. This will help in making your money work hard and generate some income and wealth which helps in the long run. People who are just savers should not get complacent, instead they should move to the second step (investing) and grow their wealth to cater to future needs as inflation and expenses eat in to their savings.
Younger people with lesser responsibilities have the best potential to save, and they should save and invest wisely to enjoy good returns in future once they have new responsibilities. I also agree with your point on the lifestyle changes or controlling spending habits which is inevitable.
Well said and I agree fully. People need to maximize the opportunity and not just stop at the bare minimum. Why not get all you can.