No matter what your age, there are certain basic concepts of good financial hygiene that will keep you fiscally fit. Whether you’re a recent grad paying off college debt or a mid-career worker starting a family, you can use these skills to achieve your financial goals and priorities.
Saving is hard, budgeting is hard, self-discipline is hard, and I can’t blame anyone for not wanting to struggle with all that. So don’t. Forget about it. And that is where automating your savings comes in.
1. Automate your savings
Yeah, I know mom and dad and grandma and grandpa stressed saving and frugality and discipline but let me ask you this: How much effort did grandpa and dad really expend on getting their pensions? None. Nada. Zero. Zip.
You know how grandpa earned his pension? By going to work every day, doing just enough to not get fired, and getting lucky that the company didn’t go bankrupt. Same for dad. And even if the company did go bust, those pensions were guaranteed by the federal government. No, pensions have gone the way of the dodo and you and your Individual Retirement Account or 401(k) don’t have it nearly as easy.
This is why you sign up to have your retirement savings automatically taken out of your paycheck. It’s easy with a 401(k) and not much harder with an IRA – just authorize your IRA custodian to automatically debit your checking account every payday, before you blow all the cash.
The same goes for any other savings goal. Is your car looking beat? Authorize a transfer of $200 a month to a dedicated savings account for 24 months and you’ve got nearly $5,000 to put toward a new one. Start now, start with what you can afford, add what you can as you see your progress and forget about it until it’s time to shop for that shiny new ride.
2. Build an emergency fund
Life is a junk sandwich, and the more bread you have, the less junk you eat. And by “bread” I mean, “the money in your emergency fund.”
Having a wad of ready cash keeps you from maxing out your Visa card when your transmission fails, when the cat needs surgery or when the refrigerator craps out. When the tree limb busts through your roof some rainy April, you’ll have the $500 deductible your insurance requires to get it patched.
Financial experts stress that you need a minimum of three months’ worth of living expenses and as much as eight months to a year, held in a plain-vanilla savings account you can easily access in a day or two.
That’s a good savings goal you can automate, as above, but even squirreling away two weeks’ worth of take-home pay can spare you from a host of expensive inconveniences that can snowball into major financial setbacks. Start with 2 percent of whatever you take home, do the automation thing, and add 1 percent every six months.
3. Don’t live on credit
Use credit cards strategically to cover unexpected expenses when your emergency fund can’t. Take advantage of big sales (if layaway isn’t offered), and to protect yourself when shopping online or with other card benefits, such as extended warranty terms. When you do charge something, make a plan to pay it off and – bet you didn’t see this coming – automate the payment. You charged $1,000 because your car needed new tires? Fine – automate $200 a month for five months and it’s paid off.
What you don’t want to be doing is using a credit card to cover your ordinary expenses, such as gas, food or discretionary spending such as eating out. That’s a sign that you need to track your spending, figure out where your money is going, and make whatever changes are necessary to live your day-to-day life without putting it on plastic. While you’re doing that, don’t go overboard on trying to pay down debt by using one of these strategies.
But do understand that if you’re regularly adding to your credit card balance just to get through the month, you’re in a dangerous situation where you not only won’t make any financial progress, but could end up with more debt than you can handle. If you need help, contact a certified credit and debt counselor.
4. Spend what’s left
So, you’re paying down your debt, building an emergency fund, and saving for retirement, which means you’re doing all the right things. Regularly check your progress and add more savings to reach your goals, but in the meantime, don’t be afraid to live your life. Set aside cash for your rent, utilities, and other bills, and it’s OK to spend what’s left.
That’s because jumping into extreme frugality is like going on a crash diet – you make some temporary progress but you’ll never keep it up. Agonizing over every dollar you spend is exhausting, depressing and ultimately self-defeating.
Life costs money and you need to live your life. Instead of turning into an obsessive penny-pincher, sketch out a financial plan, follow it and relax. Your plan won’t be perfect, it’ll change and evolve, and that’s just the way to do it. In the meantime, spring for a Dove bar if you feel like it.
5. Follow your bliss
I believe that one of the best, healthiest financial habits you can adopt is to start saving for something you really, really want, whether that’s a two-week trip to Paris or a new pair of fancy sunglasses. This will motivate you, help you clarify your goals and priorities, and build your financial discipline and savings muscles.
Money management isn’t supposed to be about constant deprivation, and this exercise will help you prove it to yourself. To do that, follow “The Dream Box Strategy” promoted by Carol Keeffe, author of “How to Get What You Want in Life with the Money You Already Have.”
First, get a container – coffee can, pickle jar, shoe box or just an envelope. Decide on your savings goal, set a specific dollar goal and write it on the container. Find a picture of what you want, and stick that on there, too. Now go through your home and gather up any loose change, bills or any other spare cash and add that to your container, and you’re already on your way.
6. A savings “Dream Box”
Next, look for ways to add to your Dream Box. You can decide to put a set amount of money regularly into the box or some other approach, such as taking every $5 bill you get and adding it to the box. Start looking for ways, big and small, to add to your box. Do this in cash, so you can see the money piling up. You’ll be surprised by how many ways you can find some extra cash to add. Even if it takes you a while to hit your goal, it’s important to do whatever you can to save toward it.
If it takes three years to save for your dream vacation, that’s OK. No matter what happens, you’ll still be three years older, or you can be three years older going on the trip of a lifetime.
