Can you really turn your financial life around? If you are like most people, your…
Saving money means setting money aside for future spending. It is a form of deferred consumption. It is not smart to spend all the money one makes without setting money aside for emergency or future use. There are many reasons why we save money. The three most common reasons are:
- As a protection in the event of a financial emergency such as health, incapacitation, sudden repairs, etc.
- To pay for an important large purchase such as vacation, property, or children’s education.
- To provide a greater sense of financial freedom, because knowing you have money gives some level of confidence.
How to Save
To reach any goal in life, one’s plan towards achieving those goals must be consistent. Therefore, saving should become a habit. This consistency is the single most important key to successful saving. Below are some specific tips on how to save:
- Choose a Specific Savings Goal: We have discussed earlier how to set goals. Determine exactly what you are saving for – for emergency, to buy a new gadget, for your children’s college, buy a new home, etc.? This will help you determine the savings goal, whether it is for a short-term, mid-term or long-term goal.
- Pay Yourself: A good way to get into the saving habit is to make sure that you “pay yourself” every month before you pay the bills. Paying yourself means never treating all your income, as money available to you for spending. Rather, allocate a specific amount that goes to you. The rest should go into savings and other purposes.
- Have A Timeline: Once you have a savings goal and know the amount that you need to save, it helps to set a timeline to reach that goal. Assign how much you will be saving and at what intervals (such as a percentage of every income you receive from any source on a weekly, Monthly, or quarterly basis). Example, if you need to buy a property that costs $12k at the end of the year, you may be setting aside $500 from every paycheck you receive bi-weekly. That will give you $1k every month or $12k in one year.
- Save Before Spending Your Monthly Budget: To be disciplined and effective, don’t set a savings goal that doesn’t fit into your income. Saving shouldn’t leave you impoverished. One good way is to ensure that your monthly budget fits into one paycheck if you receive bi-weekly checks, then save the second paycheck. Another method is to save at least 20% of your total salary each month.
- Use the Right Savings Tool: This means putting your money in the right type of account that meets your goal such as a regular savings account, Certificate of Deposit, IRA, investment accounts etc.
- Professional Money Management: A professional financial counselor can help you develop a workable savings and investment plan tailored to your needs and income. Most times the money you pay them is worth it.
How to Invest
Though ‘Saving’ and ‘Investing’ are often used by some people to mean the same thing, there is a difference. We defined Saving earlier, as setting money aside for use later. On the other hand, Investing involves buying assets such as stocks, bonds, mutual funds or real estate with the expectation that the value of the money invested will grow over time. Generally, Investments have higher returns but at higher risks (returns are not guaranteed). Saving, typically, earns lower returns but with virtually no risk while investments may earn a higher return at a higher risk. Investing one’s money wisely, where it grows, is one sure route to financial freedom. Some investment options include:
- Real Estate: Purchase, ownership, management, rental and/or sale of real property such as land and buildings for profit.
- Stocks: Buying an ownership share in a publicly traded company. It is the easiest way to be one of the owners of a big company such as Nestle Food, General Motors, Facebook, etc.
- Bonds: Lending money to either a business (corporate bonds) or a government entity (treasury bonds) with a maturity date, after which you earn back the principal plus a determined rate of interest.
- Certificates of Deposit (CD, aka ‘Fixed Deposit’: Giving a bank a certain amount of money and let them keep for an agreed amount of time. When that time is over, you get your principal back, plus the agreed interest.
- Mutual Funds: Entrusting money into the hands of a Fund Manager to invest in several companies. This is usually an option chosen by people who neither have large sums of money nor the time to invest directly in the stock market.
- Retirement Plans: Retirement plans are not a separate category of investment, per se, but means of making investments for one’s retirement. It can either be through an employer (like 401(k)) or an Individual Retirement Account (IRA).
- Cryptocurrencies: Cryptocurrencies are new types of investment options such as Bitcoin. They are digital currencies that don’t belong to any country. You can buy and sell them on cryptocurrency exchanges online.
- Commodities: Buying physical products, such as Gold, Silver, Diamond, Agricultural products etc., at low prices and resell when/where prices are high.
Savings and investment are integral parts of achieving financial freedom. Through planning diligently, you can realize your life’s financial goals. If you cannot do this by yourself, I advise you get in touch with Financial Counselors at the Fourth Man Company today at (insert email) for a start. It is never too late to start saving.