The tip of the week this week is for those of you that are just starting out with your savings. The task of building a “life savings” can be a daunting one. Oftentimes it’s difficult for people to think about the best way to save money for retirement when there are so many expenses at this stage in their life. As you get started with building your savings we recommend following this simple tip:
While building a savings that will carry you through retirement seems insurmountable, especially if you currently find yourself living paycheck to paycheck, the thought of just not spending all of your money each month is much more manageable. Only spending 90% of your money is a pretty common budgeting recommendation, some people even refer to it as “tithing yourself.”
The word “tithe” is commonly referred to in the Bible when Christians are commanded to give a “tithe” or 10% of their income to the Lord. Whether you’re religious or not, Christian or not, you can’t deny that following some Christian financial concepts by giving a “tithe” back to yourself each paycheck is a great idea. To get started with this principle of “tithing yourself” you can follow these simple directions:
Step #1: Open a new savings account- There are several reasons we recommend opening a completely new savings account to start building your savings. First, is the fact that you want this money out of site and out of mind. If you are constantly logging in to your main account you will be tempted to start using some of that money.
Second, it’s good to take a step back from the chaos of your current bank account, each month like there can be a flood of transactions between direct deposit for paychecks and then bills going out such as cable, internet, insurance, etc.. You want to be able to tell at a glance where your savings is and having all of that chaos going on in your account can take away from that focus.
Step #2: Create a direct deposit of 10% which will be allocated to your savings account- By setting up this direct deposit and having your money swept away into your savings account each paycheck the temptation to spend that money will be less and less. While employers and payroll companies are usually set up to only deposit into one bank account you can usually set up further direct deposits or allocations within your own bank account so that the money can be forwarded of swept into your savings account. If you have any questions on the best way to accomplish this with specific bank contact a teller or online banking specialist at your local bank branch.
Step #3: Do not look at your new savings account balance for at least six months! Once things are all set up and you’ve confirmed that all of the deposits and allocations are working, STOP LOOKING AT IT. While this may sound crazy, you want that money to become unreal to you, the more you look at it, the more real it becomes and the more you start to think about how you can spend that money.
Step #4: Pretend the money is not even there- While we’ve mentioned this in several other steps it’s so important that it deserves being its own step as well. If you constantly think about that money and what you could buy with it, you’ll end up spending it. This is the same reason people should not have junk food around the house when they are dieting, because if it’s there, and around, people will be more likely to cave in. As you start building your savings, consider yourself on a financial diet and remove all potential temptations. Once you have built up a savings for six months you will begin to thrive on the fact that you are building a savings and you will begin to think of ways that you can build up that savings even faster.
Step #5: Work Towards 20%- While 10% is a great starting point it’s important to point out that it’s just a starting point. Given the condition of the economy and the rate of inflation a savings of 10% of your income won’t be enough to last you throughout your retirement even if you started saving when you first entered the work force.
In addition to the rate of inflation there are also some additional reasons that saving just 10% of your income won’t be enough. The fact of the matter is that while you work towards building your savings things are going to come up. In a perfect world you’ll be able to leave that money there and never think of it again but you’re going to find that cars will break down, kids will need braces, layoffs or job loss may come and all of those things will temporary derail your ability to set aside that additional income and sometimes even cause you to have to dip into your savings to cover such unexpected expenses.
If you currently find yourself living paycheck to paycheck the thought of building your “life savings” will be overwhelming, if you find that you just don’t have 10% to spare we recommend following the guidelines in some of our budgeting blog posts to figure out if there are some expenses that you could cut to help you get to a point where you can begin building your savings. If you follow these simple steps you’ll be able to start building your savings in no time.