Ever wonder how you are penniless at the end of the month and your neighbour who earns less than you is debt free? It may be a combination of factors, but often times we lack the necessary discipline and know-how when it comes along to building a rainy day fund or contributing to our retirement income fund.
Here are a few of the most common tips we give to clients:
- Pay yourself first – Savings should be an absolute priority and so it’s vitally important that you put money aside for savings as soon as you get paid rather than saving ‘whatever is left’ at the end of the month. As soon as you are paid, deposit 10% (more if you can afford it) of your pay cheque into an instant access or 7 day notice account. This approach is simple and effective and kick starts your savings habit. I recommend an instant access or 7 day notice account for newbies, therefore if you need to access cash at the end of the month, you can do so without penalties. However, as you get used to saving, look at a 30 day notice account instead.
- Set goals & time-frames – You should set both short term and long term savings goals. Plan carefully how you will save and look at how various investments may suit your longer term requirements. Like paying down debt, pick a line in the sand and work towards mini victories. Perhaps this is maintaining a certain balance in your current account instead of being overdrawn each month or put aside money in anticipation of paying your road tax or car insurance for the year ahead when it becomes due.
- Pay off your debts first – If you calculate how much you spend on servicing your debts, you can see how much more disposable income you have for saving, let alone the savings you will make by eliminating the cost of interest on your debts. Once your income is freed from debt, it can be easily set aside for saving. While there may be some debts that are unavoidable in the short term such as your mortgage or a new car loan, your goal nevertheless should be to live debt free.
- Avoid your credit card – Credit cards should only ever be used as a cash management tool and not a borrowing tool. However all too often we mistake a credit card for the latter. Credit cards can be extremely useful tools, but for those lacking self-discipline they can lead to trouble. You may consider opting for a pre-paid credit card which still offers you the protection of a credit card but help you avoid the pitfalls of credit card debt.
- Keep track of your finances – We may wish to avoid opening up our bank statements or logging on to online banking, but we’re better of knowing than not knowing the state of our finances. If we can anticipate being overdrawn on our current account or over limit on our credit card, we may be able to transfer funds in time to avoid those nasty over limit and overdrawn fees.
There are many other ways in which you can kick-start your savings and investments goals. If you want to look at more in-depth methods, simply contact Money Adviser