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July 14, 2009

Nine Ways to Save

image004-300x176Saving is the key to your personal financial recovery.  Whether you are a retiree looking for ways to stretch your dollar, or a young family just starting out in life, saving is critical.  But what are the best ways to save?  We will examine a number of options you can employ on your road to economic recovery.


  1. Stop Spending Money.  Well, that’s not really practical, but you can substantially reduce your monthly spending by doing one simple thing… leave your credit cards at home.  Multiple studies show that we are far more likely to make purchases on a credit card.  When using a credit card, we are far more likely to make more purchases and be less concerned about the price we pay.  Spending cash hurts.  There is something in our brains that does not want to part with cash.  That something is missing when it comes to credit cards.  Leave the cards at home and your wallet will thank you.
  2. Never Buy Retail.  With today’s economy, there is no reason to pay full retail.  Sales are everywhere.  But, just because some item is on sale does not mean you should buy it.  Make lists before you go shopping.  If an item is not on your list, don’t buy it.  Lists have proven to be one of the best tools to keep your spending in check.  With large ticket items, make a list of what you will buy this year.  Then, wait for deep discount sales.  Avoid add-ons which retailers try to tack on to the sale.
  3. Pay Yourself First.  The single best way to save is by making your monthly savings the first bill you pay every month.  It is not fancy, but it works.  Decide what you are going to save each month, then make that your top priority.  Next, pay your fixed expenses… mortgage/rent, utilities, and food.  Then, you can spend anything you have left or increase your savings.  Start small, and build.  Your goal should be saving 10% to 15% of your salary.  Begin at a level that makes sense, and schedule increases systematically in the future, i.e., every six months.
  4. Use Two Different Types of Savings.  First, set up a “put and take” account.  This is an account where you put money in knowing that you will take it out in the near future.  Every year, expenses come up that are outside of your monthly budget.  Maybe the washer breaks down, or the car needs a new transmission.  These things happen.  So, part of your monthly savings should be set aside for unforeseen expenses.  The second type of savings should be in a “put and keep” account.  This account is not to be touched.  It is to be left alone to grow for your long-term future. 
  5. Set Up an Emergency Account.  You should have at least 6 months of income in a liquid investment for possible emergencies.  The purpose of this fund is to provide for you in the event of disability, job loss, or serious illness.  Bank accounts and money market funds are good choices.
  6. Pay Down Those Credit Cards.  While this may not technically be savings, each dollar of debt you pay off will save you between 18% – 22% interest.  Americans have become credit card addicts.  We typically own more than 10 cards and carry over $8,000 in debt.  This debt adds up to billions of dollars of interest that we are wasting each year.  Many people only pay the minimum balance.  At that rate, they will be paying off their cards for years and years to come.  Set yourself free.  Pay off those cards!  Start by not using them anymore.  Then, pay two, three or four times the minimum payment.  The higher the payments, the quicker you will be out of debt and the more interest you will save.
  7. Use Tax Advantage Savings.  (401ks, 403bs, Company Pension Plans)  If your company offers a defined contribution plan (401k), enroll in it.  If you are already in your company’s plan, look into increasing your contributions.  For 2009, you can contribute up to $16,500 ($22,000 if over age 50).  If your company has a matching program, all the better.  But if it does not, continue anyway.  Every dollar you contribute will lower your taxable wage and, therefore, your tax bill.  Meanwhile, the earnings in the 401k are tax deferred.  Your goal should be to increase your contributions on a scheduled basis until you hit the maximum.  Your retired self will be glad you did.
  8. Look into a Roth IRA.  If you qualify, a Roth IRA offers unique features.  Currently, the annual contribution limit is $5,000 per year ($6,000 if over 50).  Contributions are not deductible, but earnings grow tax free.  After five years, or age 59½ (whichever is later), you can begin tax-free withdrawals for life.  The Roth IRA does not require you to begin withdrawals at age 70 ½ like traditional IRAs.  So, if you so choose, you can keep your money in the Roth, earning tax-free returns for your entire life, leaving a larger legacy to your heirs.
  9. Check Your Insurance Coverage.  We all need insurance.  Whether it is to protect our home, car or other personal possessions.  We also need to protect our families against the financial loss from the death of a breadwinner or the catastrophic cost of long-term care.  While we all need it, we should not be paying more than necessary.  Check all of your insurance coverages.  Is it enough?  Is it too much?  Are the costs reasonable compared to the competition?  Do an insurance review once a year.  It could make a huge difference down the road. 


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