You begin every year by resolving to save more, but it never seems to happen. Why? Because you're skipping at least one of these steps.
“I’ve got all the money I’ll ever need, if I die by four o’clock.” – Henny Youngman
Nearly everyone wants to accumulate money – that’s why “saving more” is such a common New Years Resolution. But if you’ve failed at this resolution in the past, take a few minutes to review the steps below. If you follow them – all of them – you’ll end up with more money a year from now than you have today, guaranteed.
Step 1: Establish, or reestablish, your goals
If you’ve resolved in the past to “put away more money this year” and failed at doing it, the reason why is because that’s a silly goal. It comes from a vague fear that you’re not doing as well as you should, rather than from a compelling desire to accomplish something meaningful. So step one is to forgot about money and focus instead on something fulfilling that you have a compelling need to accomplish. Are you trying to retire early? Buy a house? Start a business? Fund a college education? Join the Peace Corps?
If you want to save more this year, start by thinking about what really motivates you. When you decide what that is, put a price tag and deadline on it. For example, if what you want more than anything is to achieve the security of owning your own home, what will that house look like? Where will it be? Exactly how much will it cost? And on what date will you have that amount saved? Now you’ve got a real goal, and the odds of reaching it are also real.
Once you establish your goal, visualize it as many times every day as you possibly can – the more, the better. Your goal should become a borderline obsession. The more you visualize it, the more likely it is to happen. If you’ve failed at achieving a goal in the past, this is probably the reason why: It wasn’t compelling enough to change your behavior.
Goals that get accomplished have three things in common: they’re specific, they have a time-line attached, and most important, they’re compelling. If you can create a goal that combines all three of those ingredients, you’ll succeed.
Step 2 – Find extra money with a spending plan
Once you’ve established a compelling goal that requires money, you’ll find it. How? Well, there are only two ways: earn more, or spend less. There are plenty of ways to earn more money, from overtime to eBay. You can also earn more on your savings: more on that below. But regardless of whether you make more, you should also find extra money by spending less.
Before you start seeking ways to spend less, however, first see what you’re spending now. As we suggested in the recent post, Resolutions 2011 – 5 Steps Toward a Debt-Free Life, that involves tracking your expenses with a spending plan, also known by its less-empowering name, a budget.
You can create your spending plan from scratch, use one of the budgeting spreadsheets we offer here, or use some high-tech method like Mint, Bundle, or any number of other online options. But however you do it, do it. Because tracking your expenses allows you to see if you can spend less without sacrificing your quality of life.
When you start reviewing your expenses, you can immediately start finding ways to save. For example, if you’re spending $400 a month on groceries and would like to try reducing that by $50, check out 28 Tasty Tips to Save on Food. Or, if you’d like to spend less on your monthly gasoline bill, try 28 Ways to Save on Gas You Already Know, and Maybe One You Don’t. No matter where your money is going now, you’ll probably find ways to reduce your expenses and increase your savings.
And when you start allocating your money with a budget, don’t forget to expect the unexpected. Every spending plan should have a category for “other expenses” to account for emergencies like car repairs. Otherwise you’ll continually be struggling to meet your goals.
Your spending plan is where the rubber meets the road when it comes to finding the money to meet your savings goal. Is it a hassle to keep track of what you spend and seek out ways to save? Maybe, but it must be doable, because every business in the world from Exxon to the corner dry-cleaner does it every day. And so will you if you want to reach your savings goal.
Step 3 – Pay yourself first.
Who would you rather see get rich – the local utility company, or you?
While that might seem like a dumb question, most of us behave as if we’d rather see our local utility company succeed. After all, we’re much more likely to automatically pay our power bill than we are to automatically pay into our savings account. There’s a reason the mantra “Pay yourself first” has been repeated by professionals for years – it works.
The way most people approach saving is trying to put aside “whatever’s left over at the end of the month”. But since there’s nothing left over at the end of the month, their saving program never gets off the ground. You’re (hopefully) already having money withheld from your paychecks to fund a workplace 401(k) or other retirement plan: See if your employer can withhold more and have it put in a savings account. If they can’t do it, you can – use online banking to automatically transfer money from checking to savings every month. The most important check you write every month is the one that funds your goal: automate it.
Step 4 – Maximize your returns.
If you’re like most people, you work hard for every dime you make. But there is an exception to that, because once you start accumulating some savings, they can do part of the heavy lifting.
Compound interest is one of the great wonders of the investing world. It’s a simple concept – compound interest merely refers to earning interest on your interest. But that simple concept translates into major differences in reaching your goals. Consider the following: suppose you’re able to save an extra $5 a day, or $150 a month. If you can do that for 20 years, here’s how much you’ll accumulate in various interest-earning scenarios.
- Earn 2 percent: $44,219
- Earn 5 percent: $61,655
- Earn 10 percent: $113,905
- Earn 15 percent: $224,586
As you can see, if you make your savings work harder, you’ll reach your goals faster. Of course, there’s no free lunch: you can’t earn 15 percent without risk, and risk could mean losing money and ending up farther from your goals. So before you experiment with investments that offer a greater return in exchange for more risk, it’s important to educate yourself.
Investing in things like stocks and real estate isn’t rocket science, and it can pay off in a big way. I earned 36 percent on my stock portfolio last year, and more than 80 percent in less than two years. (See How I Beat the Pants Off the Pros Last Year.) While that kind of return isn’t common – nor do I expect to repeat it – it illustrates why it’s important to learn about more than simple savings accounts.
And for that part of your money that you must keep totally risk-free, at least shop to make sure you’re getting the highest rate possible. Most people spend more time shopping for milk than they do for savings rates, and shopping rates is actually easier. We have an interest rate search on this site and there are others.
Step 5 – Stay on track.
We can all think of instances when we’ve enthusiastically pursued a goal for a while, only to have that compelling desire fade over time. That’s natural, especially with goals that require years to reach. How can you stay motivated? One way is join with like-minded people that can help you you stay focused.
For example, when it comes to stocks, an investment club that meets monthly will help you learn while you earn. You can also stay connected to other people online, like me and others like me. Ask questions and join the discussion!
Bottom line? When it comes to saving more, you have the ability to make it happen. Make this the year that you stop promising and start doing.