Wednesday, December 2, 2009

Pretend You Are Making Less

Pretend You Are Making Less – With all of my tips for saving money, ideas for making money, and lists of ways to make the most of your money, the bottom line is that the only way to accumulate money is to live on less than you earn. If you have no discipline with money - that is, if money burns a hole in your pocket - then you need to pretend that you don’t earn all that you do.

This is no different than having your spouse hide the Halloween candy so you won't eat it. If you have no discipline from pigging out on candy if it is in front of you, then you need to pretend it’s not there so you cannot dig into it. Obviously some people have more will power with money than others. And if you are one of those who will spend money it if it comes into your hands, then don’t let it come into your hands. Or put it away as soon as it does. There are several ways to do that:

Use Direct Deposit – Have your work direct deposit your money into a savings account. This way you are not actually receiving a check that is begging to be cashed. Once it’s in a savings account, you can transfer a fixed amount per month to your checking account for your use for the month. Everything that remains will become your savings. Some companies or banks may even do this for you – they may automatically arrange for a percentage to go into your checking account and a portion to go into your savings account. If your company does not do this, then do it yourself as soon as you get paid!

Put the Money In a Separate Account Yourself – As soon as you get paid, whether you use direct deposit or not, put a portion of your money in a separate savings account. You can do this with every paycheck or on a monthly basis. On the day that you get paid, write out a check and send it to a savings institution, mutual fund, or other savings vehicle.

Invest In Your Company’s 401(k) – If your company offers a 401(k), then participate in it! The minimum you should put in is up to the amount that they will match. If you can swing it, put in the maximum into your 401(k) that the law and your company will allow. The 401(k) money comes out of your paycheck much like your portion of your health insurance premiums. When it comes out automatically, you don’t even miss it! Plus, because it’s coming out pre-tax (you don’t need to declare that money as income until you withdraw from your 401(k) fund so you don’t pay taxes on it), then the blow isn’t that bad.

Save Any Extras - Put any bonuses, extra paychecks, raises, or overtime pay directly into a savings account. If you are living on $50,000 per year and your budget reflects that, then any bonuses or overtime should not need to be spent. Put these extra payments right into your savings account. If you get paid every two weeks and have a monthly budget, then your two extra paychecks can be deposited right into a savings account. If you have been living on $40,000 per year and get a raise for next year of 5%, then try to put 5% of each paycheck right into a savings account.

Have A Budget Envelope For Savings – If you do an envelope system or something similar, have a budget for savings. It can be for any amount. When you put your cash into envelopes for groceries, rent, gasoline, you put a certain amount into savings, too. Then each month bring it over to the bank.

All of these plans won’t work for everyone, but you should be able to take away something to work for you. Many of us manage to find money to eat out, to go away for the weekend, or to buy a new dress, there is no reason why we shouldn’t be able to put aside money for savings. And it often works best if you take out this money before you spend it on other things.

In Real Life (IRL) – My family lives on 75% of what we earn. The other 25% comes out of our paycheck either through automatic deductions or at the beginning of a pay period before we spend it. Our budget, for all intents and purposes, is based on the remaining money.

We get the maximum allowed by my husband’s company deducted for his 401(k) contribution. Because we never see this money, we are not tempted to spend it, and we don’t even realize it is there or miss it. And at the end of each quarter we are thrilled to record that we are saving thousands of dollars toward retirement without any real sacrifice on our part.

While we don’t do an actual envelope system like some people do, I do have a category for each type of spending – true expenses categories and savings categories in our budget. If you were to see my budget, you would see a line for our monthly mortgage payment, a line for gifts, and a line for college savings, for example. For our children’s college funds – we save $2000 per year per child - $500 per month goes toward college savings. I usually like to invest in $1000 increments, so I often put the money in a holding account before I put it toward their college savings. We do something similar with our Roth IRA funds.

Currently we don’t have room in our budget for any “extra” savings anymore, but when I was younger and single, I sent away about $200 per month to a mutual fund company. As soon as I got paid on the last day of the month, I would write the check and send it off. Not only did that savings build up quickly without me every really getting a chance to see the money, it allowed me to purchase shares in a mutual fund at different points throughout the year so that I wasn’t putting all of my money in when the market was high. Years later, I haven’t touched that mutual fund and have nearly $20,000 in it just from putting a couple hundred dollars into it each month.

Lastly, because my husband's new company gives 26 paychecks per year, we take the two extra paychecks and use them for savings. This is a forced savings for us. We live on the same two paychecks per month, so those two months where there is one extra, it goes right into savings.

All of these types of forced savings are often advised by experts as paying yourself first. Wouldn’t you rather pay yourself the money than pay the guy down the street who is roasting gourmet coffee or give money to the the big box chain that is selling the latest electronics? Don’t you want and need the money more? Don't you deserve the money YOU earned? Then take the money out of your paycheck and put it in savings before you get a chance to give it to someone else for something you don’t really need. And you won't even miss it.

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