Your car breaks down-again. As you wait for the tow truck, you ask yourself how you will find the money to pay for repairs. You have to have your car to get to work. Your credit cards are near their limit. You find yourself wondering if you really needed to buy that new sofa last week, using up more of your credit card limit. Now you are going to have to load up on even more credit card debt to repair your car. You do not have much in savings. After paying your monthly bills, there just never seems to be enough left over. You are really wishing that you had made more effort to save a little each month.
Unfortunately, many of us find ourselves, at some point in our lives, in this very position: large credit card debt, monthly expenses that are almost too much to handle, and little or no savings. You hear about the stock market. Maybe if you tried some basic money saving techniques, you would eventually have enough to invest. How do you get started?
Here are some of the best tips you can follow today:
Pay yourself first.
Put yourself in your budget as a creditor and pay yourself each month as surely as you pay your rent or house payment. After all, you need some financial security.
Set a short-term savings goal.
It's important to have an emergency savings fund that's equal to three to six months' of your salary. If you take home $1,500 a month, you'll want $4,500 in the fund to cover living expenses in case of a job loss or illness. This needs to be a priority; having these savings will keep you from reaching for that credit card the next time the car dies, but you don't want to skip credit card or mortgage payments for emergency savings.
The easiest way to build emergency savings is to economize. Think about where your money goes. If you can't remember, track your spending daily in a small notebook and add up the totals at the end of the month. Note every penny you spend and what you spent it on. Now start cutting the fat out of your budget. Bringing your lunch to work instead of buying it can save $5 to $10 each day. Brewing your own coffee instead of getting that fancy latte can save $3 to $4 each day. Instead of dining out, order a pizza in. By taking a few nearly painless steps, you'll free up $100 or more each month for savings.
Open a passbook savings account.
This is where to keep your emergency savings. Forget about the debit card and ATMs. You want to make it inconvenient to get at this money so that it's not readily available when you feel the urge to splurge.
Usually, you can open a passbook account for an initial $100 deposit. Let's say your goal is to save $2,000 in one year. You open a bank savings account that earns 3% interest, compounded daily. If you make monthly deposits and take no withdrawals, you can save your $2,000 in one year by depositing $162.04 per month. That's only a little more than $37 per week and $5 per day.
Set up an automatic transfer.
Check with your bank and see if they will automatically transfer the amount you want to save each month to your savings account. If your job provides you with an automatic payroll deduction plan, have the amount you need to save taken out each week or month. If you never see the money, you won't miss it.
Pay off your credit cards.
Making the minimum payments on credit cards is a trap. In some cases, it could take you 30 years to pay down your balance, thanks to interest rates. Interest also means that you pay more for everything you buy with a credit card. For example, if you bought a sweater for $100 and made minimum monthly payments over two years at an interest rate of 14.9%, the final cost of that sweater would be $116.25-money that could have gone into savings.
Paying off credit card debt is your second highest priority after setting aside emergency savings each month. If you have more than one card, start by paying off the one with the highest interest rate first. Pay as much as you can over the minimum monthly payment to keep your financing charges down. Once that card's balance is at zero, take the money and put it toward paying off your other credit cards. Getting the first one to zero could take some time, but paying off subsequent credit cards will be much faster.
Bank a windfall.
Inheritance? Tax refund? Big lottery win? Put it in your emergency savings or use it to pay off credit card debt. You'll gain far more from a windfall in the long run if you do this. You can spend a small amount of a windfall as a treat, but this should be less than 25% of the total you receive.
Set a long-term savings goal.
With emergency savings banked and credit card debt reduced, it's time to tackle your most important savings goal: retirement. If your employer offers a 401(k) plan, make full use of it, and be sure you're contributing an amount equal to what your employer will match. That match is part of your compensation, and ignoring it is like giving some of your salary back each week.
If you don't have a 401(k) plan at work, consider setting up an Individual Retirement Account. These tax-advantaged accounts allow your money to grow tax-free on the interest, and you may be able to deduct your contributions from your income taxes, depending on the type of account you open and your income level.
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