Wednesday, August 25, 2010

Make Savings A Priority

Tip #270 - Make Savings A Priority. When thinking about money, many of us think about how we would spend it - a new car, a vacation, new clothes, etc. Most of us don't think about how much we would save. Saving is actually secondary in most people's thoughts with regard to money. However, if having money is one of your goals, then you need to make savings the primary thought. Many of us would like to be "rich." but if all we think about is how we would spend money, then we aren't like to become "rich." Instead, we need to make saving, rather than spending, a priority. Once savings becomes a priority, the getting rich part will fall into place.

If you were to make a budget on how you will use your hard-earned money, you would need at the top of the list a housing budget, a food budget, a utilities budget (such as water and heat), a transportation budget (to get you to and from work), and a healthcare budget. The above items are priorities in most American lifestyles. After that, you should budget for savings - how much you want to put away for YOU. You want to have some wealth to your name, don't you? Then decide how much you want to save each month for you. This money will give you the power to do things you want to do when you wan to do them.

After you decide on how much you want to save for yourself, then you budget however you want with the leftover income - cable t.v., a yearly vacation, a daily coffee, dinners out, etc. The key is to make sure you make savings a priority above your wants. To simplify, your budget should look like this:



Once we start making savings a priority above our wants, we will, over time, have enough money to take care of our wants and other needs that arise. Depending on your income, and your expenses for your needs, you may still have enough money for wants in your monthly budget. But you shouldn't spend all of your money on wants after your needs have been satisfied. Savings should take priority over wants in your monthly budget. Then down the road when a chance to take a ski vacation comes up, you can look to your savings to do it. Or if you decide you want to add a deck to your house, you can do it. Or if your son suddenly falls and breaks his leg, and you have to pay all kinds of doctor and hospital copays and leave work early without pay to drive him to various appointments, you can do so because you have money in your savings account. You wouldn't be able to pay the doctors with the daily cups of coffee that you drank over the previous years.

In Real Life (IRL) - When I was younger I made savings a priority in my budget. I shared housing with friends when I was single. I split utilities with roommates. I limited my eating out. I didn't waste money going to bars. And I socked $200 away per month in a mutual fund. And I did this on about $20,000 per year in Washington, DC. (I was fortunate not to have a car payment or student loans.) I also budgeted for one vacation per year and going out with friends (although usually to inexpensive locales).

Over time, I saw my savings account grow because having savings was important to me. Believe me I could have spent away $200 per month pretty easily - higher-end clothing, dining out in nice restaurants on a regular basis, buying a fancier car, living on my own rather than have roommates, etc. But instead, I made saving money a priority, and after 10 years of saving $200 per month, I had more than $25,000 to show for it. (I actualy had more than this because I upped my savings as my income grew.)

Of course everyone's situation is different. Some people will have more needs to pay for than others such as medical expenses, student loans or debt repayment. And therefore, their savings will be less than others. But the key is to do the savings on a regular basis above frivolous wants that cut into your chances of attaining wealth over your lifetime. As long as savings becomes a priority, you will find you have more power to spend moeny as you please down the road.

Wednesday, August 18, 2010

Don't Let Deals Chase You

Tip #269 - Don't Let Deals Chase You. There is a lot written in the online world about how to "save" money. However, in order to "save" money, you need to spend some, which really isn't saving money at all. There are deals being thrown at us from blogs, credit card companies, auction sites, online stores, and emails from daily deal websites. Unfortunately, often these deals often cause us to spend more money than we normally would even if we get a good buy on what we bought.

If you want to truly "save" money - that is put money away in your bank account, the only way to do it is to not spend it. Getting 50 percent off tickets to a football game is not going to save you money unless it was already in your budget to buy football tickets at full price in the first place. Driving to the drugstore to pick up yet another bottle of shampoo when you already have 10 bottles in your bathroom cabinet costs time, gas money, and wastes space for something of which you already have an adequate supply. And clipping that Buy One Get One Free Ice Cream Sundae won't save you money if you can enjoy a similar treat for less from the supermarket.

If you are truly interested in saving money - that is putting away money - then do not let deals tempt you to spend more than you would otherwise, no matter how good of a deal it is. The only way you can save money on deals is if it is an item in your budget that you had planned to pay full-price for already. Then at time of purchase you look for a better price on it. That will lead to savng money. Spending money on haphazard items that were not in your budget in the first place, will only cause you to spend more money and have the exact opposite effect that you think a "deal" will do. So, if you want a deal then go after one on something you had already planned to buy. Don't let the deals chase you and cause you buy something you weren't planning to purchase.

In Real Life (IRL) - I am bombarded on a daily basis from deal sites - some that come into my email, some that are through sites I visit, and some that come in my mailbox out at the street. While I feel I have pretty good restraint when it comes to spending money, I am often tempted to buy something that is a good deal. If I get a flyer for a hotel that is having a special, I will read through it and ponder the idea of making a quick getaway trip since it's such a good price (vacations are a weakness of mine). I am subscribed to some daily deal sites that send me emails everyday about deals in the area. I have yet to buy something from one of them, but I have been pretty close a couple of times. And I read blogs that talk about saving money and have lists and lists of items you can purchase at a good price. Problem is, I don't need most of those items.

And while I can pass on good deals or waste a bit of money frivolously without going into debt, there are many others who are struggling financially now and do not have a dollar to spare, no matter how good of a deal something is. And I am afraid a person who wants to save money - that is build up their savings account, reading all of these deal sites can cause the reader to actually go out and spend more than they even normally would. Yes, they may have more goods and/or experiences to show for it than if they had paid full price for these items, but if they are spending more money on things they normally wouldn't buy, then they are worse off than before they frequented all of these deal sites.

If you are one of those people who is struggling financially and hope to put away more towards savings each year, make sure that you are not sucked into buying things that are a good deal, thinking that you are saving money. Let your budget driving your buying decisions. If you are have $300 in your budget to spend on a hotel for a weekend getaway, then shop around for a deal. But don't let an email promising you 50% off a hotel cause you to take a vacation that you would not have taken. Your budget should control your purchases. Don't let the deals control what you buy. That will not save you money.

Friday, August 6, 2010

Don't Discount CDs For Savings

Tip #268 - Don't Discount CDs For Savings. Yes, CDs (Certificates of Deposits, not the music kind) currently have ridiculously low rates, I know. But they can still be part of your savings plans. Many of us in this low-interest market want the kind of returns that only stocks and high-risk investments can possibly return. But remember that those high-risk investments with potential for high returns also can have negative returns. So that stock that you were hoping would acheive a 10 percent return for the year can return a negative 3 percent instead. While a CD can return a positive 3 percent. That's a difference of 6 percentage points.

CDs certainly aren't for every person for every savings goal in every season or for ones whole portfolio. But they do have a place in most people's portfolios for many goals. For example, if you are saving for retirement, and are 30 years old, most financial experts would tell you to put a majority of your investing into stock mutual funds or something similar since retirement is so far off. Some might follow the old rule of thumb of subtracting your age from 100 and putting that percentage in stock mutual funds (70% in this case). They may advise to put a smaller percentage in bonds (maybe 20%) and a still smaller percentage in cash or guaranteed investments (maybe 10%). Well, why not look into CDs for those guaranteed investments? My credit union is paying about 3% for a 5-year CD these days. It's not much, to be sure, but it does add some nice balance to a portfolio.

Of course you don't need to follow anyone's rule of thumb with regards to investing. You need to do what is comfortable for you. I know people who like to take on a lot of risk and put nearly all of their money for their retirement into stock mutual funds. I also know some people who are quite conservative who tend to hold more a higher percentage of CDs and government bonds than are recommended.

CDs are a good place to start out with your investments because you will earn greater returns than a savings account or money market account. You will be tying up your money for a certain amount of time, though, which is why you get the greater return. CDs are guaranteed by the FDIC so you cannot lose any money if the bank goes under. If you belong to a Credit Union, that is a great place to start with CD savings since they tend to be more flexible with penalities for withdrawing early on a CD. And if you don't belong to a credit union, you should consider joining one.

CD's might also have a place in your college fund portfolio. While many people in the past few years socked money away in their 529 plans that lost money, the 5-year CDs had rates of 4% and 5%. Doesn't sound so bad, does it? Better than the negative returns many experienced but not as good as the 10% or 12% than many hoped would be the case. Remember college savings isn't all that long of a time frame (18 years at most). And if the rates are in negative territory, there is not too much time for them to recover before your son or daughter goes off to school.

Just because CDs aren't a high-risk, high-return investment, doesn't mean that it's not right for you. Low risk, low return investments have their place in many people's portfolios, too. And while they are not as hip, cool, or sexy as stocks and mutual funds, they are sometimes a better choice.

Consider what you are saving for, how long you have to save for your investment, how much risk you are willing to undertake, and what other investments you have in your portfolio to see if there's a place for CDs among your investments.

In Real Life (IRL) - I really like CDs. I have some knowledge about stocks. I have some knowledge about mutual funds, and I am not scared or inexperienced in investing in either one of those. And during the early 1990's some stocks and mutual funds were my best friends, giving me great returns. But I never let go of the "guaranteed" CDs. Sure they were returning 5% when stocks were giving me 12%, 15% or even 20%. But they gave me some sense of stability and added balance to my portfolio.

When we started saving for college, I put a fair percentage in CDs. They were returning over 5% when I started these 5- and 7-year CDs. With only an 18 year time-frame from the first time I invested for my daughter's college to a much shorter time-frame now (only 10 years away), CDs actually seem like a good choice to me for that short time period. About 75% of our daughter's portfolio is earning 4%-5% for college. And while I know full well that I'd be singing a different tune if the stock market were soaring now rather than declining, I am still happy earning a lesser percentage in return for peace of mind.

Our retirement portfolio also has a higher-than-suggested-by-the-experts proportion in CDs. We have about 40% of our retirement in CDs and similar guaranteed investments even though our retirement is still 20 years away. It's a percentage I feel comfortable with at this stage in our lives and with the state of the economy. And yes, I know inflation can sometimes outpace CD returns, but stocks can have bad years so I pick what I consider the lesser of two risks for the time frame I am investing for. Others may choose differently.

Another reason I like CDs is because we found out we are able to "back invest" in our education and retirement CDs at our Credit Union (Navy Federal Credit Union) during a grace period, which we can invest in CDs that we already have open. This is a great option since we have some CDs with a few years left on them that are paying over 5%! (This is why I love credit unions!) It's a deal we only found out about last year, but we have been able to add to both our retirement account and education accounts this past year, and plan to do so while we still have these good rates.

So consider CDs carefully. They can be a valuable tool in many investment portfolios. For other ideas on how to spend less money or save some up, check out Frugal Fridays.

***Please note that I am not a financial advisor nor a financial planner. I am just one person who is interested in saving and investing money. My thoughts are my opinions only. You should seek qualified investment advice from a professional before you invest.