Saving refers to the preservation of money for future use. Such future use might include capital and goods purchase (house, transport, vacations, etc.), emergencies, and miscellaneous expenses. Strictly speaking, saving is the difference between our income and our consumption expenditure. Besides, saving is our main tool to cope with mortgages, credit card debt, extraordinary bills, and other loans. Without savings, such debt and expenditures may sharply erode our personal finances. Saving also allows for harnessing sudden investment opportunities and to gain access to quality services. All in all, saving is a fundamental aspect of personal finance.
Money has to be tightly controlled. We must know where money comes from, and where it goes to. We must strive to know the way our money flows, the paths it travels, and the drains taking most of our income. By closely watching our money’s nature, we’ll learn to control it. Control is a keyword of personal finance. Control refers to checking the errors we are incurring with our money’s management, and to take the corrective action to rectify any deviation from our desired goals. Setting goals is other important requirement for saving, and it answers the question what are we saving for ?
In the following, we’ll review 12 recommendations for a better saving:
- Register Everything: Write down a (complete and exact) list of your monthly spendings. When the month ends, examine your list, sort all the expenditures and you’ll notice those spots and activities which represent an opportunity for saving. The list will also allow you to see at a glance how consistent you truly were distributing your money. The general idea is to detect new opportunities for saving. You’ll be surprised of the great opportunities that knowing our money’s flow offers. Furthermore, the list is the first step into making a monthly and annual budget. Preparing budgets is also an art, and we have to start to hone our planning skills as soon as possible.
- Review your Invoices: Please, review all of your services’ invoices. A few decisions or changes may yield miracles. For example, turn off lights when they’re not in use; leaving your lights on when no one is in the room is a huge waste of energy and money. These are simple measures that every member of the family can contribute to. Remember, a penny saved is a penny earned.
- Tune up your Services: Besides reviewing our invoices, we could benefit from analysis and more drastic actions. Do you really need the long-distance calls service? Do you really watch all the channels included in the platinum subscription of your cable service? Check if your communications provider offers more economic plans, adjusted to your real needs. We should also apply a similar approach to banks’ services: let’s look for financings with lower interests and compare different banks to open a savings account. Additionally, try to save in water and gasoline.
- Amortize your Credit Card Debt: Decide on the right amount of money you might assign to amortize your credit card balance. Try to lower a bit your nonessential expenses in order to pay more than the defined minimum proportion of the bill. Remember, amortizing your credit card balance may be a wise investment. Other step you may take is that if you have several credit cards, cancel the ones you are actually not needing: this will save you from the fee and other commissions of the credit card, and additionally prevents wrong uses of your credit capacity.
- Create a Plan of Pensions for the Future: Research if the company where you work offers a contribution retirement plan (e.g., 401(k)). Under such plan, your employer will start “deferring” a portion of your wage. Typically, you also are able to select from a number of investment options (stocks, bonds, etc.) A nice side of this type of retirement plan is that the company does all the bureaucratic steps for you. Needless to say, a retirement plan is a form of saving.
- Review your Insurance Contracts: Are you paying the right cost for insurance? An insurance coverage is very important for our mental relax. But compare the types of insurance policies, including life, home, disability, health and even those covering small business, and select what you indeed require. And specially, reject insurance policies that are too pricey or that contain too many exclusion clauses.
- Write a List of the Things You Have to Buy: Next time you go shopping, prepare a list of the things you have to buy. Else, you may yield to compulsive purchases, and acquire things you perhaps don’t need in that moment, such as movies, cellphones, clothes, etc. If you have to purchase a dear item, please research your options thoroughly, compare prices, and choose the offer providing the best relation price/quality.
- Prefer Automatic Payments: Some financial institutions can arrange for automatic payments to be deducted from the user’s bank accounts, thus avoiding late payment altogether as long as the cardholder has sufficient funds. Take into account that when we have to go out to do payments, we are subject to the business pressures to purchase things we don’t need. And transport also represents an expense, of both money and time. Furthermore, automatic charges prevent us from paying extra commissions for late payment. All your services could also be automatically charged, and by the end of the month, you’ll have saved a lot of money, and avoided plenty of worries. Be careful, though, not to forget to keep the source account with a proper level of funds.
- Recognize the Impact of Inflation: Inflation results in a rise in the general level of prices over time. Watch out for inflation as it can erode the real value of your savings. Inflation is a hidden risk pressure for those with savings to invest them, rather than have the purchasing power of those savings erode through inflation.
- Setting goals: For example, a possible long-term goal is “retire at age 60 with a personal net worth of 300,000 US dollars”, and a mid-term one is “buy a house in 5 years paying a monthly mortgage servicing cost that is no more than 23% of my gross income.” Besides retirement and a house, other goals could be related to paying off credit card (as told above), college and university costs, medical expenses, etc. Such financial goals help to direct financial planning.
- Planning and Executing: After setting the goals, the next step is to define the financial plan, which should describe how to accomplish our goals. Regarding this how-to, we could follow the guidelines stated in the previous points. Now, execution of the personal financial plan often requires discipline and perseverance. Don’t hesitate to look for professional help (accountants, investment advisers, lawyers, etc.) if you have some doubts.
- Monitoring and Assessment: As time passes, the personal financial plan must be monitored for possible adjustments or reassessments. Try to improve all the suggestions I’ve given above.
Remember that saving is an art, and as such, it requires to be a genius or a lot of practice. The ultimate goal is to combine skill, craft, and wise judgment, in order to distribute our money in the best possible way.