Once upon a time, people saved for things before they were able to buy them. However, we have gradually drifted from being savers to spenders and being in debt, due to the easy availability of credit. For many people, their expenditure is more than their earnings, which means they are using credit to purchase things. Put another way, they are using tomorrow’s income to fund today’s consumption.
But another and better way is to live within your means and save for the things you want, particularly consumable items. While interest rates are low it may seem like a good idea to buy what you want now and pay for it later. Unfortunately, with the possible exception of housing, most items purchased are what’s known as depreciating items or assets, where the value of the good decreases over time. If this item has been purchased on credit, it is most likely that by the time the item has been paid off, the value of the good is far less than when it was purchased.
In addition, there has usually been interest charges applied to the loan, which means the actual cost of the item ends up being far more than the initial purchase price. Wouldn’t it be better to save the cash for the item, save on the interest expense and be in a better negotiating position to obtain a discount because you’ll be paying in cash?
The easiest way to start saving is to have this happen automatically without much or any effort required. This can be done by establishing a special savings account, preferably one that you can’t access easily or penalizes you, for example with lower interest rates, for withdrawals.
Then set up an automatic transfer to move a set amount from your regular account into this new savings account. Or you might be able to speak with your payroll department about having your salary paid into two accounts, your regular and your savings account.
How much should you put into your savings account? It’s completely up to you! A good rule of thumb is 10% of your income, but you can change this figure to suit you. Ten percent might be a bit much to begin with, especially if you do have outstanding debt. Start with whatever you can comfortably afford to begin with. This percentage can always be increased over time.
Be aware of all facets of your income which can include overtime, commissions, bonuses, tax returns, cash gifts, sales of assets and myriad other things. If your automatic transfer only transfers a set amount of your fixed base salary every pay cycle, you might need to manually transfer your percentage amount to your savings account on any additional income.
Use the miracle of compound interest. It is said that Albert Einstein referred to it as the eighth wonder of the world. This is when you start earning interest on your previously earned interest, although its most dramatic effect is after a longer period of saving.
Eventually you might think about setting up a number of savings accounts such as a consumable items savings account (there’s that TV, car and holiday we were talking about) and what you might want to call your “wealth account”. This is your investing account and from where you purchase income producing assets.
How much you earn has no bearing on your ability to save. It’s not about how much you earn, it’s what you do with what you earn that’s important. The point is, it doesn’t matter how much you save or when you start saving, what matters is that you start.