How do you save money?

Question  How do you save money?

Answer  If you spend less money than you take home, live below your means, you will have money to save.

Complete Answer  There are many ways to save money, every thing from putting your spare change in a piggy bank each day to money automatically deducted from your pay and put into diversified investments. Do what ever works for you. The important things to remember are:

  1. Start right now! Albert Einstein said, “Compound interest (earning interest on interest) is the eighth wonder of the world. He who understands it, earns it . . . he who doesn’t . . . pays it”9. For example Adam and Alice agree to save $10,000.00 each for retirement which is 30 years away. Alice started right now by investing her $10,000.00. It took Adam ten years to save the $10,000.00 to invest in his retirement. Even though both invested $10,000.00 for retirement, in 30 years, Alice will have $24,568.42. Adam, because he waited ten years to invest his money, will have $18,207.55. They both saved $10,000.00 for retirement. But because Alice was earning interest on interest (compounding) she will have $6,360.87 more than Adam. For this example the interest rate is 3% compounded monthly.
  2. Make savings a priority. The first thing in my Spending Plan is savings. Each month I begin by saving 10% of my take-home pay. That financial literacy concept is called “Paying Yourself First”.
  3. Make it easy. If a task is inconvenient or cumbersome, it’s easy to put off or skip it altogether. Have part of your pay directly deposited to a savings account, have money automatically transferred from checking to savings each month, round up purchases to the next even dollar and then leave that amount in your checking account, or putting your spare change in a piggy bank at the end of each day are just a few ways to save money.

Misconception  A common misconception about saving is some people believe or are led to believe that buying something on sale is saving money. Some people go so far as to believe that buying something on sale is actually investing money. Both concepts are incorrect. When you buy something on sale, you are simply spending less money.

Financial Literacy Knowledge/Skill

Saving money begins with living below your means, make it a priority, make it easy to do, and begin saving now.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How much money should you be saving?

Is saving money important?

Question  Is saving money important?

Answer  YES!

Complete Answer  Without savings;

  • You are living paycheck to paycheck. Any interruption in your regular paycheck, such as a sudden illness, a cut in your work schedule, a temporary layoff,  will cause your finances to quickly spiral downward.
  • You don’t have money for a financial emergency expense.
  • You cannot afford big ticket items (down payment on a house or a car, purchase of a washer/dryer, furniture, et ectera).
  • There is no possibility of a comfortable retirement in your future.
  • Most disheartening of all, at the end of another year,  you have nothing to show for a year’s worth of work.

Financial Literacy Knowledge/Skill

Understand that savings is an important element of your financial literacy.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How do you save money?

Can you afford that?

Question Can you afford that?

Answer By answering these two question you will know the answer; 1. What is your take-home pay for the month? and 2. Is the expense equal to or less than the recommended category amount in your spending plan?

Complete Answer Ironically, as a kid you knew the answer. When your parents gave you $10 to buy your school lunch, you knew you only had $10 to spend on lunch and you spent it accordingly. The same principle applies as an adult. Unfortunately as adults, at times we have to buy things that we cannot pay cash for at the time of the purchase. Most of us could not pay cash for a house or a new car. For those purchases that have to be financed, the same principle applies. What is your take-home pay for the month and what is the monthly cost of the item you are buying.

For Example: Can you afford an apartment? The total expenses (rent, utilities, insurance, et cetera) should not be more than 30% of your monthly take-home pay. Can you afford a new car? Again, the monthly expenses of that new car (payment, insurance, scheduled maintenance, gas, et cetera) should not be more than 15% of your monthly take-home pay. You get to set up the categories and the amounts (percentages) for your spending plan. The important thing to remember is that your total expenses should never be more that 100% of your take-home pay.

Financial Literacy Knowledge/Skill

Know what you can afford.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: Is saving money important?

What’s the difference between needs and wants?

Question  What’s the difference between needs and wants?

Answer  Needs are those things that are required for you to live, thrive and survive. Wants, on the other hand, are those things that enrich our lives, things that we enjoy, things that are nice to have, things that are important to us.

Complete Answer  Needs would include things such as shelter, food, clothing, health care, transportation, education and a marketable skill. In the example of Adam the imaginary person (post of August 29, 2016), he was spending 33% of his take-home pay for housing (shelter) and 16% for car expenses (transportation). Both expenses are considered needs and were within the guidelines of an effective spending plan.

Dining out, a new car, a vacation, going to a ball game with friends are examples of wants. In a recommended spending plan, wants fall into the category of Lifestyle. An evaluation of Adam’s spending plan showed that he was spending more than he as taking-home, and specifically, the excess spending was for wants; Adam’s spending was 42%, the recommended amount is 25%.

In summary, Adam needs to spend less than he is taking home, specifically, he needs to cut down on his Lifestyle spending. This may take a little temperance8, but with a little forethought and practice, he will be able to bring his spending down and spend less money than he brings home each month.

Helpful Hint  Cutting down on Lifestyle Expenses is the easiest way to spend less. Not going out for dinner, not buying those new shoes, making coffee at home, and checking out a movies from the library (free) are just a few examples of decreasing Lifestyle Expenses.

Financial Literacy Knowledge/Skill

Understand the difference between needs and wants.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: Can you afford that?