If you haven’t read Parts 1 - 4 of this series, you may find it helpful to go back and read through them. Please leave any question, comments, or suggestions in the comments at the bottom of each post, or email me with the contact page. Thanks!
Many of you probably read Part 4 of the series and after running the numbers on how much you need to save, thought "How can I possibly save that much? I'm already having trouble making ends meet." This post is designed to help you deal with that problem. We're going to talk about financial streamlining, and finding places to save money. Hopefully we can uncover some relatively easy and painless ways to find the money you need to reach your long-term financial goals. These measures may not get you all the way to where you need to be, but hopefully they'll be a good starting point. Please keep in mind that most of these suggestions come from my own personal experience or those of friends and family, and are not meant to be comprehensive. They're just some general ideas to get your creative juices flowing. Post any additional ways that you've found to streamline your own life and I'll revise the post and add them as appropriate.
Some general suggestions for everyone:
If you still find that you're not able to meet your investing goals, consider the following:
That last one sounds a little sinister, but you shouldn't worry too much just yet. Most people will be able to find the money they need in steps 1 – 3, or possibly step 4. Also, remember that you can take these steps now or you can take them later, but if you do it now, it will be much easier. According to MoneyCentral, people in their forties have a median balance of just $40,000 in their retirement accounts. These people will need to save huge amounts of money over the next twenty years just to catch up to where they need to be. Don't let that be you. Make it easier on yourself by starting now.
Let's take a look at each of the above in more detail.
Budgeting
We discussed budgeting in detail in Part 3, but I wanted to mention it here again in the context of saving money. Since I have started budgeting, I have reduced my expenses by 10 - 20%. The really unexpected part of that is that I don't really feel the pinch. Part of what budgeting helps you do is get control over the way in which you spend money. You start to see all these little here-and-there expenses and realize how much they're actually costing you. This prompts minor lifestyle adjustments, sometimes even subconsciously. It's hard to explain, but I think anyone who has been budgeting for awhile will understand what I'm talking about. Give it a try for a few months and you'll see what I'm talking about.
Take advantage of free or low-impact ways to save money
Coming up with money to invest doesn't always mean drastic lifestyle changes or cutting out things that you enjoy. Sometimes you can find investment money just by making some minor "tweaks" to your lifestyle that won't really cost you much in terms of time or depriving yourself of things you want. Let's run through a few examples:
Save your change
It might seem trivial, but just tossing your change into a jar at the end of every day can add up. If you're married and you each have around $1 in change at the end of the day, that's over $700 at the end of the year. Toss that money into a good index fund every year and watch it grow. Do this for 40 years at a 10% return and you'll have almost $380,000. Not bad for some spare change you'll probably never miss anyway.
If you find that you rarely use cash and thus don't have much change, a variation on this idea is Bank of America's Keep the Change program, where each debit card transaction you make is rounded up to the next dollar and the difference is deposited in a savings account automatically.
Review your insurance
Insurance is one of those necessary evils in life. It sucks to pay those premiums every month, but if you ever really need insurance, you'll be glad you have it. However, like anything else, insurance providers are not equal. Once every couple years or so, review your insurance coverage to see if you can optimize your protection. In particular, you're looking for three things:
In general, you don't want to skimp on the insurance, but make sure that you're not overpaying for what you're getting. Cutting $50 / month from your combined insurance premiums and investing the money for 40 years at 10% adds up to more than $316,000. Not bad for a few minutes of hassle every couple years.
Review monthly subscriptions and accounts and close those you no longer use
Subscribe to magazines that just end up stacks? Have an old gym subscription that hasn't been used for months? Maybe you paid for some kind of online service that you don't use often, or have a club membership and don't attend anymore. Write down a list of all of these types of things that you can think of and be honest with yourself about whether it's something you still need. While you're at it, review your utilities, cell phone plan, and internet service. Make sure everything you're paying for is really needed and cancel all the rest.
Avoid ATM and other useless banking fees
When you stop and think about it, it's a little preposterous to pay $2 to get $20 out of the ATM. You're paying a 10% fee to access your own money. Try to use your bank's ATMs or carry some spare cash to avoid that ATM fee. Also, there is very rarely a good reason to pay for a checking account. Most major national banks offer free checking with no minimum balance. If your bank currently charges you for a checking account, you should consider switching to one that doesn't.
Pay off your consumer debt before you start investing
Once you've identified some money that you can invest every month, it's time to determine whether you're ready to start investing. As I discussed in Part 2, you should pay off any consumer debt before you start investing. Once you get rid of that high-interest debt, you'll have more free cash each month to invest in your future, instead of throwing it away on interest. And speaking of interest, while you're paying off that debt, it's a good idea to call your credit card company and attempt to negotiate a lower interest rate. If you've been paying on time for awhile and you let them know that you'll be switching to a lower-interest card if they don't work with you, they'll often lower your rate, which can save you a lot over the course of the repayment. If they still refuse, transfer your balance to a lower rate card, which you can find here.
The exception to the rule that you should pay off your debt first is the 401k match. We'll talk more specifically about 401k's and what they can do for you in a later post, but what you need to know now is that many employers offer free matching on any funds you choose to put aside for retirement. A common matching formula is $0.50 for every $1 you invest, up to 6% of your pay. For example, let's suppose that someone making $30,000 per year decides that they'll set aside 6% of their pay each month, or $1800 per year. If their employer offers matching like the example above, the employer would contribute an additional $0.50 for every dollar of the first 6% that the employee contributes, meaning that the employer would contribute an additional $900, for an annual total of $2700. These matching funds cost the employee nothing and are essentially free money. If your employer offers matching on 401k contributions and you're not yet signed up, stop reading this and go sign up immediately. You're throwing away free cash every day that you're not taking advantage of such an offer.
Examine ways to make bigger cuts
Stop smoking, drinking coffee or soda, and hitting the vending machine
When you're looking at the vending machine, $.75 doesn't seem like much for a bag of chips or a can of soda. However, if you buy a couple of items every day that you're working, your spouse and you can together save $60 / month just by avoiding the vending machine. None of that crap in there is good for you anyway. Bring some healthy snacks to work from home and drink water instead of soda.
A latte at Starbucks will set you back $3 or so. Hit this a couple times a week with your spouse and you're looking at $50 / month. Make coffee at home or work, or cut it out of your diet completely.
Finally, quitting smoking is definitely one of the highest-yield improvements you can make in your life. Not only could it save you hundreds of dollars each month from not buying cigarettes, you'll save money on insurance premiums and medical costs. And most importantly, it could save your life.
Bring lunch to work
Eating out is awesome. I love it, and I do it way too much. Home-cooked meals are great, as long as I don't have to cook them or clean up after them. Also, packing a lunch in the morning is such a pain. However, eating lunch out 5 times per week for $6 / lunch is $120 per month. If your spouse does the same thing, you're looking at almost $250 / month. Ouch. If you and your spouse switch to bringing lunch from home just 3 days a week, you'll save $150 / month.
There are many other examples of ways you can alter your lifestyle and save money. Post some of your tips in the comments and I'll add them to the body of the post.
Task: Streamline your financial situation
Now that you've put your budget together and come up with a rough idea of what you should be saving each month, it's time to compare and see if the two match. If not, use the ideas above, your own brainstorming and budget review, and Google to come up with some ways to trim the fat from your budget until you're able to set aside the target amount each month.
Check back Wednesday for Part 6.
Disclaimer: I am not a professional financial adviser. All information herein is provided in good faith. It is not intended to be, and should not be relied on as, a substitute for independent legal, financial, tax or other professional advice. Readers should seek appropriate legal, taxation, accounting, investment or other expertise in their local and overseas jurisdictions.