If you want to cultivate healthy financial habits this year – and stash away some money for your emergency fund, your retirement, your kid’s college education and that elusive worldwide vacation – now is the time to develop smart saving practices.
But if you’re going to become an extreme saver, you need to act fast and start adopting some new financial patterns. Because as tempting purchases come up, chances are you’ll forget about your vow to save money this year. So, if you’re going to commit to a more frugal lifestyle and eliminate your past budgeting mistakes, experts suggest following these steps.
Treat your savings funds like any other bill. You wouldn’t want to fall behind on your mortgage, would you? Of course, falling behind on payments happens, but you wouldn’t do it intentionally.
You need to apply that same type of thinking with your savings. Along with your mortgage or rent, your cellphone bill and other living expenses, a check to be deposited to your savings account, and hopefully a retirement fund, should be set aside each month.
Jennifer Myers, a certified financial planner and the president of SageVest Wealth Management in McLean, Virginia, puts it this way: “The mentality of an extreme saver focuses on how much cash coming in the door can be saved rather than spent.” So, a diligent saver is going to find the money and put something away every month.
Automate your savings program. You’ve probably heard it a million times, but virtually every financial expert will insist that automation works. Set up an automatic transfer with your bank or credit union so that every month money is deposited into your savings account, your retirement fund, your kids’ college savings account, your emergency fund and so on.
If you automate the payments to your savings account, you won’t forget to make them, says Derek Hagen, a certified financial planner, a wealth coach and the founder of Hagen Financial in Minneapolis. “Automation – and ignoring the Joneses – goes a long way,” he adds.
Embrace delayed gratification. “Extreme savers do not make a lot of money. They just save a lot. They’ve learned about delayed gratification. They understand that compound interest is the eighth wonder of the world,” says Alexander Lowry, a finance professor and executive director of the master’s in financial analysis program at Gordon College.
“Anybody can do it. To compound successfully, you need perseverance in order to keep you firmly on the savings path and, of course, you need time, time to allow the power of compounding to work for you,” Lowry says.
Lowry also emphasizes that there are more extreme savers out there than you might realize. “They’re your neighbors who drive old, beat up cars. They don’t take lots of fancy vacations or own a boat. They have a simple but happy life. They derive pleasure from knowing they’re saving for retirement, college and so on,” Lowry adds.
Marry well. Sure, it helps to marry somebody well off, but that’s not the key to developing smart money habits and achieving your ultimate financial goals. If your spouse feels the same way about saving as you do, you’ll set yourself up for success. After all, it’s hard to save a lot of money and budget well if one person is carefree or reckless with money.
Don’t accumulate more debt. Too much debt, like revolving credit card debt, weighs you down and keeps you from having extra money to put into savings. In fact, what should be incentive to dig yourself out of debt – particularly credit card debt – is how much more money you’ll have to put toward your savings.
“Paying off credit card debt is one of the best investments anyone can make. Paying off credit card debt at typical interest rates effectively makes an investment that returns 15 to 20 percent per year,” says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network, a debt, mortgage and personal loan financial service company.
Start saving small amounts. You don’t become an extreme saver overnight. For most people, it’s risky and impractical. Think of it this way: If you start shoveling too much of your paycheck into savings and retirement, you might find yourself continually broke – and then perhaps reaching for your credit cards.
Some personal finance experts recommend allocating 20 percent of your take-home pay toward financial goals, such as retirement or debt repayment. With that budgeting approach, known as the 50/30/20 budgeting rule, you would commit 50 percent to living expenses and 30 percent to flexible costs, like entertainment, vacations and birthday gifts. So, if you ascribe to the 50/30/20 rule, plan to set aside no more than 20 percent of your income for long-term savings.
Less flash means more cash. Myers points out that people who are extremely good about saving money tend to not be overly concerned with their image.
“You often don’t see extreme savers living in large houses, driving fancy cars or wearing designer clothing,” she says. “They don’t keep with up with the Joneses. In fact, they don’t even care about the Joneses. They care about themselves, their security, their future independence and their values.”