Wednesday, February 4, 2009

How a Disciplined Saving's Plan Helps You

Saving money is a stated objective for most Americans. The conversations about money discuss debt, bad credit, and an occasional remorseful story about money wasted. Most people will tell you that they need to do a better job of saving and they wish they had more saved. If saving money was a real objective for Americans, we’d have more saved.

The value of saving is not etched into the soul of people. Having a lucrative job and taking home lots of money should be adequate to bill a large savings account. Yet, people will buy more expensive cars and houses to show their success rather than increase their savings account. Real savers have budgets and have acquired good spending habits.

Budgets help you identify goals and help you plan for the future. People generally spend every dime of their take home pay. But, what would happen if you established a goal of living off of half of your take home pay?

This isn't an impossible task. It does takes planning and commitment, however. Planning requires you identify a budget that only uses half of your take home pay and commitment requires you to stick to the plan.

Needs and wants dictate how we spend money. The goal of treating your basic expenses such as rent/mortgage, food, utilities, allowance, and insurance as your primary needs will help you understand how you are wasting money on your wants. Your needs can’t change but your wants can be adjusted.

Theoretically, let’s take a $300 savings plan, assuming this is half of your take home pay, and see how we can acquire more when we incorporate disciplined savings into our budgets. First, identify short term (vacation, emergency fund, and miscellaneous) and long term (college fund, 401(k), and IRA) objectives. Decide how much is needed for each objective. For our illustration, we will have 6 accounts and allocated $50 to each.

Vacation - $50 Emergency Fund - $50

Miscellaneous - $50 Child’s College Fund - $50

401(k) - $50 IRA - $50

Managing and redirecting your current wants will enable you to have greater accomplishments. Your current wants are also known as your short term goals. They're usually inexpensive to obtain and only provide temporary satisfaction. A new purse or a new pair of shoes may satisfy a current want but it will only be replaced by a similar want in a very short period of time.

Saving half of your take home pay allows you to identify and accomplish larger goals. Defining and classifying a savings goal helps you achieve short term and long term goals. Discipline will be learned when you allocate money to multiple savings objectives.

Taking the monies saved for vacation. Based on a biweekly pay period, you will save $650 annually for a vacation. This may not be enough to take the dream vacation you currently want. You know that if you save more this dream vacation is attainable. A vacation is a luxury that can be included in the average budget.

You will not only be accomplishing your savings goals, you will also have your money working for you. The money you save accrues interest. Investing your money in stocks and mutual funds can make your money work even harder.

If you open an account in a bank, you will only earn compound interest. This may be adequate for your vacation and emergency fund saving objective. However, if you purchase the right stock and mutual fund, you will gain more by receiving dividends and capital gains. Your child’s college fund, your 401(k), and an IRA may not be used for 20 – 30 years later.

Saving half of your take home pay may be a bridge too far at this time. It can, however, become an aspiration. Setting high goals that are unattainable gives you something to work toward. When you fall short of reaching this bigger goal, you will be that much farther ahead. In other words, your objective is to save half but you were only able to save 30%. That’s still good. It’s better than setting a goal of saving 10% and only saving 3%. The higher you set you goal, the better off you will be.

Monday, January 26, 2009

Teach Your Children How To Save Money

Unfortunately, it's all too easy to raise financially irresponsible children. The danger: Your kids will grow up to be financially reckless, and you will feel compelled to bail them out. Don't want to spend the rest of your life footing their bills? Then teach your children about saving money.

It is important to give youngsters financial responsibility. You can start with a toy-and-candy allowance when they are five or six years old and then, once they are teenagers, you can step it up with a clothing allowance and a bank account. The goal: to get your kids to make tough financial decisions. If they are always asking you for money or they are merrily racking up charges on the credit card you gave them, their desires will be limitless and spending will seem painless, because they aren't paying -- you are.

What to do? You have to set up a system where, instead of you saying "no," your kids have to say "no" to themselves. The goal: to get your kids to make tough financial decisions. The most important financial skill your child can learn is the ability to delay gratification.

As adults, we have to properly teach our children about earning money, good spending habits, and saving habits. A child is never too young to learn. I have a 3 year old grand daughter who is currently being taught the value of a dollar. Her mother has developed a technique that excites her child about earning money.

My grand daughter works for pay. She is paid 25 cents everyday for completing the following chores. She makes her bed, brushes her teeth, puts away her toys, complete her studies, and helps mommy with the dishes. She is given a star each day for successfully completing her chores along with her 25 cents. Every day she gleefully places the star on the calendar and puts away her money in her purse.

At 3 years old, my grand daughter does not want to spend all of her money at one time. When she goes to the store, she chooses to buy only 1 item so that she will have some money left. Her mother teaches her the different coins and practices using them when they play with her kitchen set. When she pretends with her shopping cart, she buys her pretend eggs, milk, etc. with real money.

No matter how poor you are, you can always teach your child about earning money. The child readily adapts to working for pay and finds creative ways to save. My grand daughter does not walk over pennies. Now when she sees a penny on the ground, she announces she has found money and gladly adds it to her stash. She understands how valuable money is when you go to the store.