Thursday, January 05, 2006
Time to get serious about Savings
Saving your money is not something that comes intuitively. While it is not hard to learn, it is a skill that requires some planning and research to be done properly. There are many reasons why we you should save you money. Short term savings goals can be for a dream vacation, while long term goals of owning your own house or retiring early can all be done if planned well in advanced. No matter what your financial situation is currently, you can act now to make great changes in your life. Just by reading this you are well on your way to reaching your goals. So without any further hesitation, lets see what this savings thing is all about.
Savings can be easily defined as the total accumulated amount of income that is not spent on consumption. This means that if you take all the money you make (income) and minus all the money that you spend on goods and services (expenditure) then what you are left with is savings. The goal here is to have your income minus expenditure to be a positive number. If it is not, that means that you are spending more money they you are making, and you will need to borrow the money from elsewhere to pay for your current consumption. Being in debt does not allow you to save any money, and will force you to make interest payments in addition to paying back the money borrowed (the principal). Interests rates can vary, but it should always be your goal to be either entirely debt-free or to pay as low of an interest rate as possible. Paying someone interest is money that you could use much more productively to meet your own financial goals, so debt should be avoided as much as possible. There are times when it does make sense to borrow money and to have debts (for example, taking out a mortgage to purchase a house) but generally, DON’T DO DEBT!
Now that we know we want to spend less money then we are making, we just have to plan out how to ensure this gets accomplished. A budget is a written plan of all the income and expenses expected over a certain period of time. A budget takes into account all of a person’s income and divides it up totally amongst every category that money was spent on. I will discuss budgeting further in a later post, but you should always include a portion of your income into savings. A general rule of thumb is that you should save at least 10% of your income. This assumes though that you do not have any debts, as it makes much more sense to pay off a debt than to save money. If you savings is earning you interest of 2%, while you need to pay off a credit card that charges interest of 9%, you should pay off the credit card as fast as possible. This is because the interest of the credit card will grow much faster than your savings. This means that as time goes on, even though you are saving money you are actually falling deeper into debt. Recording down all of your expenses allows you to plan your purchases for the month, (assuming you are making a monthly budget) which means you can follow a plan that has your financial goal in mind. Without a budget, it is very easy to make frivolous purchases that eat away at the amount of money you are able to save. By preparing your monthly budget though, you will put more thought into your everyday purchases and be able to enjoy the success of your planned purchases with money remaining each month to be saved for something you desire.
The only way to ensure that you have some money left over at the end of each month for savings is if you live below your means. All this means is that the amount of money you spend is less than the amount of money you make. The best way to accomplish this is to make your savings appear like an other expense you have. This means that you determine a monthly amount (like 10% of your monthly income) and you devote it to savings. You then need to treat this amount of money as a fixed expense that cannot be used for anything else. This may mean that you need to delay certain purchases or cannot afford to make as many impulsive buys, but it also guarantees that you will have your wanted amount of money go into your savings account each month.
A part of budgeting is obviously not spending more than you make. While this may seem like an easy concept to follow, businesses all want a piece of your money and have created many ways of taking it from you, even if you do not have the money available to pay for their goods and services. The credit card is now a member of almost all wallets in North America. They are widely accepted at stores everywhere, and are pretty much a must if you want to do online purchasing. Credit cards are a very useful tool, however if not used properly they can cause large problems. While this will be explained in much greater detail in a later post, there is one main message that you should remember when using a credit card. DO NOT SPEND MONEY THAT YOU DO NOT HAVE. If you make purchases on a credit card since you do not have the money to pay for the item, you will face high interest charges from your credit card company. With interest rates on some cards well above 15%, a $100 purchase on a credit card that is left unpaid can end up costing you over $115 with the interest payments. That $15 could have been used for many other things, and by not budgeting your money you now must give this money away. This does not mean you should not use credit cards to make purchases though. Just always ensure that you do have the money to pay for them, and always pay off the FULL balance of your credit card each month on time. By paying only the minimum payment or anything less than the full balance, you will accumulate interest that will further eat away at your hard earned money. A great example of this can be found under “Plastic handcuffs” in this article by MSN Money http://moneycentral.msn.com/content/Savinganddebt/Savemoney/P36017.asp.
Now that you finally have all this money saved up, you need to decide what is the best thing to do with it. While I will talk in the future about a variety of different investments that all carry different degrees of risk, your main focus right now should be on having a savings account. This can be opened at any bank, and provides you the ability to have full access to your money at all times, while still earning some interest. It is important to choose the bank account that best suits your needs, as some accounts can charge service fees for things you may want to do (like debt card transactions) which will eat away at the amount of money you will be able to save. Traditional bank accounts are not great sources of interest income though, and you should not expect to make more than 1-2% interest on your savings per year. There are options for greater interest rates though at online banks like ING Direct though. With ING Direct you can set up a savings account and have your money transferred directly from any other bank. Like all major banks in Canada, ING Direct is a member of the Canada Deposit Insurance Corporation, which means that all of your savings of up to $100,000 are guaranteed under the CDIC coverage. There savings account is has no fees, service charges or minimum balances. Their current interest rate is 2.75% per year, which is above what most banks will pay. The drawbacks of ING Direct though is that there is no physical location for you to actually take out or put your money (all transactions are done online or by phone). This means that you cannot use a bank card to take money out of your account instantly like you can with most traditional banks. I still recommend having an ING Direct account, and you can learn more about them at www.ingdirect.ca.
Once you start planning your finances, you can begin to save and earn interest to do things that were never before possible. That dream vacation will start becoming more of a reality each and every month you stick with your budget, and continue to save your money.
The concepts described are not complicated at all. They can be applied instantly into your life. To ensure you got them, I will reiterate:
• Don’t do debt
• live below your means
• Do not spend money that you do not have
• Make savings a fixed expense (pay yourself first)
Now that we have set a foundation for saving our money, we can begin to explore other ways to grow our money. This will be explained at a later date, but for now take the knowledge learnt today and start making a difference in your life right away.
Savings can be easily defined as the total accumulated amount of income that is not spent on consumption. This means that if you take all the money you make (income) and minus all the money that you spend on goods and services (expenditure) then what you are left with is savings. The goal here is to have your income minus expenditure to be a positive number. If it is not, that means that you are spending more money they you are making, and you will need to borrow the money from elsewhere to pay for your current consumption. Being in debt does not allow you to save any money, and will force you to make interest payments in addition to paying back the money borrowed (the principal). Interests rates can vary, but it should always be your goal to be either entirely debt-free or to pay as low of an interest rate as possible. Paying someone interest is money that you could use much more productively to meet your own financial goals, so debt should be avoided as much as possible. There are times when it does make sense to borrow money and to have debts (for example, taking out a mortgage to purchase a house) but generally, DON’T DO DEBT!
Now that we know we want to spend less money then we are making, we just have to plan out how to ensure this gets accomplished. A budget is a written plan of all the income and expenses expected over a certain period of time. A budget takes into account all of a person’s income and divides it up totally amongst every category that money was spent on. I will discuss budgeting further in a later post, but you should always include a portion of your income into savings. A general rule of thumb is that you should save at least 10% of your income. This assumes though that you do not have any debts, as it makes much more sense to pay off a debt than to save money. If you savings is earning you interest of 2%, while you need to pay off a credit card that charges interest of 9%, you should pay off the credit card as fast as possible. This is because the interest of the credit card will grow much faster than your savings. This means that as time goes on, even though you are saving money you are actually falling deeper into debt. Recording down all of your expenses allows you to plan your purchases for the month, (assuming you are making a monthly budget) which means you can follow a plan that has your financial goal in mind. Without a budget, it is very easy to make frivolous purchases that eat away at the amount of money you are able to save. By preparing your monthly budget though, you will put more thought into your everyday purchases and be able to enjoy the success of your planned purchases with money remaining each month to be saved for something you desire.
The only way to ensure that you have some money left over at the end of each month for savings is if you live below your means. All this means is that the amount of money you spend is less than the amount of money you make. The best way to accomplish this is to make your savings appear like an other expense you have. This means that you determine a monthly amount (like 10% of your monthly income) and you devote it to savings. You then need to treat this amount of money as a fixed expense that cannot be used for anything else. This may mean that you need to delay certain purchases or cannot afford to make as many impulsive buys, but it also guarantees that you will have your wanted amount of money go into your savings account each month.
A part of budgeting is obviously not spending more than you make. While this may seem like an easy concept to follow, businesses all want a piece of your money and have created many ways of taking it from you, even if you do not have the money available to pay for their goods and services. The credit card is now a member of almost all wallets in North America. They are widely accepted at stores everywhere, and are pretty much a must if you want to do online purchasing. Credit cards are a very useful tool, however if not used properly they can cause large problems. While this will be explained in much greater detail in a later post, there is one main message that you should remember when using a credit card. DO NOT SPEND MONEY THAT YOU DO NOT HAVE. If you make purchases on a credit card since you do not have the money to pay for the item, you will face high interest charges from your credit card company. With interest rates on some cards well above 15%, a $100 purchase on a credit card that is left unpaid can end up costing you over $115 with the interest payments. That $15 could have been used for many other things, and by not budgeting your money you now must give this money away. This does not mean you should not use credit cards to make purchases though. Just always ensure that you do have the money to pay for them, and always pay off the FULL balance of your credit card each month on time. By paying only the minimum payment or anything less than the full balance, you will accumulate interest that will further eat away at your hard earned money. A great example of this can be found under “Plastic handcuffs” in this article by MSN Money http://moneycentral.msn.com/content/Savinganddebt/Savemoney/P36017.asp.
Now that you finally have all this money saved up, you need to decide what is the best thing to do with it. While I will talk in the future about a variety of different investments that all carry different degrees of risk, your main focus right now should be on having a savings account. This can be opened at any bank, and provides you the ability to have full access to your money at all times, while still earning some interest. It is important to choose the bank account that best suits your needs, as some accounts can charge service fees for things you may want to do (like debt card transactions) which will eat away at the amount of money you will be able to save. Traditional bank accounts are not great sources of interest income though, and you should not expect to make more than 1-2% interest on your savings per year. There are options for greater interest rates though at online banks like ING Direct though. With ING Direct you can set up a savings account and have your money transferred directly from any other bank. Like all major banks in Canada, ING Direct is a member of the Canada Deposit Insurance Corporation, which means that all of your savings of up to $100,000 are guaranteed under the CDIC coverage. There savings account is has no fees, service charges or minimum balances. Their current interest rate is 2.75% per year, which is above what most banks will pay. The drawbacks of ING Direct though is that there is no physical location for you to actually take out or put your money (all transactions are done online or by phone). This means that you cannot use a bank card to take money out of your account instantly like you can with most traditional banks. I still recommend having an ING Direct account, and you can learn more about them at www.ingdirect.ca.
Once you start planning your finances, you can begin to save and earn interest to do things that were never before possible. That dream vacation will start becoming more of a reality each and every month you stick with your budget, and continue to save your money.
The concepts described are not complicated at all. They can be applied instantly into your life. To ensure you got them, I will reiterate:
• Don’t do debt
• live below your means
• Do not spend money that you do not have
• Make savings a fixed expense (pay yourself first)
Now that we have set a foundation for saving our money, we can begin to explore other ways to grow our money. This will be explained at a later date, but for now take the knowledge learnt today and start making a difference in your life right away.
# posted by mikeyarmo @ 5:14 PM 
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Mike, I like your message and you have a lot of good information. I think that you should hyperlink your links and write shorter paragraphs... because there is so much good info it is hard to swallow it this way.
# posted by 
: 4:13 PM
: 4:13 PM
Thanks a lot for your suggestion. I am just very eager to share what I know with the world, that I am trying to get as much out as possible. I am also just starting to learn HTML, but I think that is one area I can definately improve upon. Thank you for reading and please keep the comments coming.
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