From Budget Stretch to Savings
by Gary Foreman
Dear Dollar Stretcher,
I was wondering if you have any advice for those who have debts (don't all of us) and would like to stretch their budget to start a regular savings program. Seems like I just can't set any money aside for savings.
Gayle is not the only one who seems to have trouble setting aside money for savings. The personal savings rate in the US has dropped dramatically in the last decade. In the second quarter of 1998 the rate stood at 0.4%. By comparison, from about 1950 to 1990 the rate fluctuated between 5% and 10% of disposable personal income. In 2012 the rate rose to just below 4%, so clearly, Gayle has plenty of company!
In effect, she's really asking three questions: How do I find where to 'stretch' my budget? Once I stretch it, how do I keep the money from disappearing? And, finally, how do I begin a savings program?
Let's start at the top. Where will you find savings in your budget? The answer will vary from person to person, but there's a way to find the answer that should work for everyone. And it's simple.
The best place to save some money is where you're spending the most. For instance, most families find that they spend the greatest amount on housing, transportation and food. Just take a look at your checkbook and you'll get an idea of where the big chunks of your money are going.
Now, admittedly, some of those big checks are pretty tough to change. It's hard to do much with a car payment without taking drastic action. And, unless you're desperate, you won't be able to change expenses in some areas. Look for the ones that you can change without turning your life upside down.
For many people the food and grocery area is a good place to start. But your situation may be different. In any case, begin by looking at where the big money goes and then decide whether it's something that you can change.
OK, now you've found some savings. How do you keep them from disappearing? In some ways this is the hardest of the three questions to answer. Because it's really about how you relate to money. And although I'm no psychologist, after you talk to enough people about money you begin to see some patterns. See if you recognize yourself in any of these pictures.
Drew is the kind of guy that complains about his bills. But, you can always tell when he's gotten a raise or an IRS refund. As soon as the money is available, Drew has it committed to payments on some new purchase.
Crystal is fun to be around but sometimes she can be a little moody. You often hear her talk about how a new outfit just perked up her spirits.
Matthew is Mr. Quick Draw. He does things fast. Just bought a new home theater system this weekend because 'it seemed like a good deal'.
What do these three people have in common? No matter how much money they save by careful budgeting, that money will disappear before it gets into a savings program. So if you're like these three you'll need to find a way to solve the problem.
One way is to create a spending checklist. Commit to asking yourself these questions before you make a purchase. Do I really need it? Could I meet this need with something else? What would happen if I didn't buy it? Can I really afford it? Is there something else that I'd really rather have?
Another way to solve the problem is to make the saving urge as strong as the spending urge. Some people do that by choosing a goal that they're willing to save to achieve. It could be something as simple as a night out with your mate or as expensive as a vacation. Just remember to keep that picture in your mind when the spending urge occurs. In fact, some people even put a reminder in their wallet so they can't help but think about that goal before they make a purchase.
Once you actually begin to accumulate some money, you'll want to put it to work for you. In most cases you'll want something that's safe, pays a reasonable return and allows you to add a small amount of money on a regular basis.
For Gayle, that probably means that she should pay off any debts first. She'll get a guaranteed rate of return (the interest rate charged on her debt). And she can add as much money as she wants each month.
After that it's time to set aside some money for emergency expenses. That way when an unexpected auto repair, home repair or medical bill pops up it won't end up on the credit card. Again, you'll want your money to be safe, pay a reasonable return and allow you to add to it whenever you can. In most cases that means you'll be using a savings or credit union account, money fund or certificate of deposit. The certificates don't have as much flexibility, but do pay a little better.
The final step is to begin investing for growth. What you expect from an investment will change a little here. You'll probably be willing to give up a little safety to get a higher rate of return. Being able to add small amounts on a regular basis will still be important. You'll also need to make sure that the commissions and expenses don't eat up any investment returns.
For most individuals, selecting a no-load mutual fund is the best choice. They're really well suited for the individual who has a little money to invest and doesn't have the time or desire to study stocks. Many good funds will allow you to open an account with as little as $100 and add even $25 or $50 whenever you want. They do all the stock picking and record keeping. That's pretty hard to beat for the small account.
Some people will want to pick the stocks themselves. And that's fine. You'll need to save up until you have a reasonable amount to invest. Typically, it's best if you can buy and sell stocks in multiples of 100 shares. And you really need to commit more than $100 when you make a selection. Even with the deep discount brokers offering $7 trades, by the time you buy and then sell your shares it still totals $14 for commission. If you bought $100 worth of shares, you'd need to have a 14% appreciation just to cover the commissions. So you really should be thinking of a few hundred dollars or more when you buy individual stocks.
There you have it. A plan to help you find a few dollars that you can begin to accumulate to build wealth. We hope that Gayle finds some of those dollars and has a wonderful financial future.
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter or visit Gary Foreman on Google+. Gary is also available for audio, video or print interviews. For more info see his media page.
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