For many, saving enough money each month will unsure a comfortable and happy retirement. Putting enough away in a savings account will also allow people to cope with dramatic lifestyle changes, or pay for unexpected costs without hassle. Most importantly for me, saving each money will ultimately provide you with financial freedom. Freedom to work when you want, for as long as you want, if at all!
However a chronic problem across the whole age spectrum is that not enough cash is being saved. Even worse, many individuals or families are actually spending more than they’re saving each month. Running a budget shortfall like this only push back your retirement age and increase stress & worries for the future. It doesn’t have to be like this.
Here are my tips for how you can practically force yourself to save money each and every month.
Pay Yourself First
The concept of paying oneself first is widely used in business and government. Look at how the government takes the income tax from your payslip before you even touch it. The government understands paying oneself first. Look at how liquidators and administrators of bankrupt companies are the number 1 priority creditor of the insolvent business, ensuring they get paid before anyone else.
The implications are simple, first you need to create a savings or investment account that penalises or disallows withdrawals. Second, you need to setup an automated bank transfer into the account to come out 1-2 days after your payday (to allow for a late payment).
Choosing the Right Account
Identify your ‘investment horizon’. Are you savings for a purchase in the short or medium term (< 10 years) or for a retirement fund in the long term (10 years or greater)? If you’re saving for the short or medium term, you will want a high interest savings account. If you’re saving for the long term, you absolutely need to be in stocks and shares if you want to get the most out of your money and protection yourself from the nasty effects of inflation.
If you’re reading this article then you’re either a bad saver or a hopeless saver. Bad savers have a great pick to choose from when it comes to savings accounts, as they don’t need to physically lock their money away to stop them from spending it. Bad savers should aim to transfer their money into the highest paying bank account available. Agreeing to not touch it for 3-5 years will usually yield the highest rates on the market.
Hopeless savers on the other hand are restricted to mutual funds or fixed term savings bods/certificates, both of which carry charges for withdrawals. If a restricted-access account isn’t solid enough to protect you from spending urges, you may want to consider setting up a discretionary trust fund (whereby the trustee, who could be your parent will legally hold the money on your behalf), although that is a complicated option only for extreme cases!
Find tips on choosing ideal savings and investment accounts here on Financial Expert.
Creating and account and setting up a standing order is all there is to it! You have successfully forced yourself to save, and this will begin paying off in no time!
Of course the only thing left is to sit back and watch your interest come in every month, or watch your diversified portfolio grow over the years! Take a look at this graph which shows how a £1,000 investment would accelarate in growth when earning 7% (a conservative average return for stocks & shares). This shows that if you pay yourself first and save just £83 p/m this year, you could have an extra £15,000 in 40 years time!