Just a few weeks ago we were all swearing that 2011 was the year that we would [insert ambitious financial goal]. But then the second week of January rolled around and [insert daily distractions] threw us off track.
If your resolve to spruce up your finances this year is starting to wane, don't throw in the towel just yet.
How does putting a savings plan in place, ignoring it for months, and reveling in your success at the end of 2011 sound to you? If it seems like less drudgery than what you had mapped out, then give this four-step savings shortcut a shot.
STEP 1: TAKE A PAY CUT.
No one puts $20 in their wallet in order to save it. It's there to spend, so spend is what we do.
That's why the first shortcut to help you secure your financial future is to give yourself less money to spend. As they say, out of sight, out of mind. And so it goes with money.
Take a couple of minutes - yes, right now - to complete this task:
· Pick a dollar amount you can bear to part with every paycheck -- don't overthink, just come up with a figure. (Go ahead. I'll wait.) Write it down on this handy Save More Kit.
Yup. That's it. Now, onto Step 2.
More ways to save: 50 Simple Tips for Big Savings
STEP 2: GO AHEAD AND SPLURGE. SERIOUSLY.
Spending temptations are everywhere. You can either make yourself miserable by denying yourself even an occasional treat. Or, you can embrace your guilty pleasures (the morning latte, monthly mani-pedi, or whatever puts a kick in your step) and indulge without remorse.
The key to enjoying those treats truly guilt-free is to make them a formal part of your budget. Yes, you may have to make tradeoffs - e.g. premium cable vs. daily coffee; a few more brown-bag lunches vs. blonde highlights for the dog. You get the picture.
Here's how:
· Make a list of the small indulgences that are most important to you. Rank them in order of important/priority to your personal happiness.
· Come up with a weekly (or monthly) allowance -- an amount of money you can afford to spend on this guilt-free treat. If the answer is $0, look for areas where you can slash expenses to divert funds towards this allowance.
· Put your splurge money in an envelope and use that cash for that purpose only. No cheating. When the envelope's empty, you'll just have to make do with instant coffee until it's time to get your next allowance.
Shelling out good money for flights of fancy may sound like financial heresy. It's not, so long as you don't skip this next very important step.
STEP 3: HIDE YOUR MONEY UNTIL YOU NEED IT.
You've already earmarked money you can bear to part with in Step 1. Now you simply have to put that money somewhere where it's out of reach.
The way to do that is to automate, automate, automate There are several ways to do this.
· Have your boss take it out of your paycheck: If you have an employer-sponsored retirement plan you're not maxing out, direct more of your paycheck to that account. Even a 2% or 3% increase in contributions will make a huge difference down the line, and you won't miss it in the present.
· Have your bank suck it out of your checking account the same day (payday) every month and stash it into a separate account that's not accessible by debit card or whining.
· Same goes for brokerage accounts and mutual funds. We'll show you how to painlessly get started propping up your retirement kitty throughout this series.
The best part about automatically diverting money into savings (and out of spending reach) is that you don't have to weigh whether to get a latte or put that $4.68 into an IRA. If you've followed along so far, you already made that decision. So enjoy that frou-frou coffee drink. Sip it while you find ways to make your dough grow, which brings us to Step 4.
What money goes where and how much? Guidelines for short-, mid- and long-term savings vehicles.
STEP 4: PROFIT.
Next, it's time to make that money work as hard as it possibly can.Words cannot properly convey the power of putting money aside on a regular basis and letting it grow. So here's a visual aide that illustrates how a single $1,200 investment grows over time in four savings scenarios.
|
Savings Account (0.5%) |
Money Market Fund (2%) |
Certificate of Deposit (5%) |
Stock Market (9%*) |
|
|
Initial investment |
$1,200 |
$1,200 |
$1,200 |
$1,200 |
|
5 years |
$1,230 |
$1,325 |
$1,532 |
$1,846 |
|
10 years |
$1,261 |
$1,463 |
$1,955 |
$2,841 |
|
15 years |
$1,293 |
$1,615 |
$2,495 |
$4,371 |
|
25 years |
$1,359 |
$1,969 |
$4,064 |
$10,348 |
|
30 years |
$1,394 |
$2,174 |
$5,186 |
$15,921 |
|
35 years |
$1,429 |
$2,400 |
$6,619 |
$24,497 |
|
40 years |
$1,465 |
$2,650 |
$8,448 |
$37,691 |
*Based on the stock market's historical rate of return.
As you can see, simply socking away one lump sum and leaving it can transform $1,200 into nearly $40,000 over 40 years. Not only have you earned interest, but you've earned interest on your interest. And all you had to do was invest your first paycheck. Thank you, compound interest!
Tinker with this compounding calculator and see for yourself how that figure you chose in Step 1 will grow in different savings scenarios. Don't be surprised if you decide to revisit Step 1 and up the amount of money you're willing to set aside every month.
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Fool.com columnist Dayana Yochim hides everything from herself. Her money, chocolate, the dog's leash, the other sock that goes with this one.
