The most crucial step in building and securing your financial future is saving. That said, saving is a principle that is often much easier to talk about than actually implement. As you make plans to save for your financial future, consider these five easy tips that, when implemented correctly, will immediately help you save more:
1. Get the Big Picture. How do you truly measure your personal financial standing? Is it the number on your paycheck, the dollar amount in your bank account or the assets you have obtained? In reality, one of the best ways to determine your financial standing is by determining your net worth.
Net worth is the difference between your assets and your liabilities. Assets include cash, savings accounts, retirement accounts, real estate, or anything else of durable value that you own. Liabilities, on the other hand, are things such as mortgages, credit card debt, student loans and other debts. In other words, your net worth is determined when you subtract what you owe from what you own.
Tracking your net worth gives you a clear, overall picture of where you stand financially. Once you know your net worth, you can then work on building that number. Building your net worth is crucial to your financial future because an increased net worth typically brings increased financial independence.
2. Make your Money Work for You. As you start to increase your savings, consider where you are saving your money. For example, contributing to a tax-advantaged account like a 401(k) or IRA will help your assets grow faster than in a normal after-tax account. Additionally, investing in diversified stocks and bonds will allow your money to grow over the long term and withstands the inevitable toll of inflation.
If you saved $1,000 per month for 20 years at 8 percent interest, you would end with almost $600,000. If you did the same for 40 years, you would have almost $3.5 million saved. However, if your growth rate is only 4 percent, you would have $366,000 at 20 years and $1,181,000 at 40 years. How and where you save money matters, so make sure to do your homework and consult with appropriate investment experts to optimize your investment strategy.
3. Automate Your Saving. We have all heard the saying “pay yourself first”; however, most of us likely agree that this is easier said than done. Money in your checking account always seems to find a way to get itself spent. Automating the growth of your wealth is the solution.
One way to achieve this is to opt into your employer's retirement plan, which is most often a 401(k). When these automatic deductions are in place, money will come straight from your paycheck and you will not even know you missed it. Additionally, these contributions will decrease your income tax bill for that tax year.
In addition, try setting up automatic transfers or a direct deposit to a savings or investment account with each paycheck. This prevents you from seeing the money in your bank account and being tempted to spend it. Instead, a portion of each paycheck will be automatically placed in an account where it can grow and benefit you in the long run. This method can be both the simplest and most effective route to boosting your savings rate and growing your wealth.
4. Use Raises to Your Future Advantage. Increasing the amount of money you save each month can be difficult because it requires sacrifice. You have to take money from somewhere else in order to add it to your savings. An alternative to this presents itself when you get a raise; instead of using that extra money to increase your current cost of living, you can put a portion of it into savings every month.
For many people, a raise means a nicer car, house, phone or maybe an expensive vacation. However, before you up your cost of living, consider investing in your future self. When you commit a portion of your raise to ensuring your financial future (through a savings account, 401(k), 529 college savings plan, etc.), you commit to save before you are accustomed to receiving a larger paycheck. You can continue living the same lifestyle as before while still dedicating a larger sum to savings.
5. Take Baby Steps. Don’t make goals that are beyond your capacity to reach. Start small. Perhaps you decide to increase your savings by 1 percent each month for 6-12 months. Maybe you create short-term saving goals like saving $20 a week. You can even begin by simply saving any change you receive. These “baby steps” can change your attitude about saving and eventually lead to noticeable results. Rome wasn’t built in a day and neither was your retirement account. The small changes you make today can have an immense impact on your future financial life.
This article was furnished by TrueNorth Wealth, a financial advisory firm in Salt Lake City.