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How to Save Money

By: Brian Kim - April 14, 2008

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I read some fascinating statistics in last Sunday’s Parade magazine in the Los Angeles Times. I remember one statistic showed that 43% of people have nothing to save after they pay their bills. They live paycheck to paycheck and if they lose their jobs, they’re in some pretty deep financial trouble.

In addition, Americans are saving at the lowest rate since the Great Depression. Couple this with the whole subprime debacle going on now, rising gas and food prices, inflation in general, stagnant wages, job losses, and it’s a pretty messy financial picture out there for a lot of people right now.

And to make matters worse, young people are not getting the proper personal finance education they need, which will only further exacerbate the situation in the future.

Growing up, I always assumed that people would be able to manage their money wisely. It just seemed like common sense to me - something that would be instinctive to most people. Advice such as live within your means, save regularly, don’t buy things you can’t afford, etc., seemed pretty straightforward but the events happening now seem to show otherwise.

If you look at how people deal with money as a whole, it can fall into two realms - the logical and the emotional.

For some reason, some people cannot even embrace the logical part which really surprises me. For example, there always seems to be a personal finance video clip floating around on any news site out there with a family in financial trouble and then a financial planner swoops in, magically creates a budget by writing down how much they make and how much they have to pay in bills and trims the fat off the budget which puts them back on track and the family is always surprised and pleased with the results. That stuff really amazes me because the act of making a budget is so simple. It’s so basic. Yet people don’t do it. Or maybe they’re not even aware of it.

And people wonder why they’re in debt and in financial trouble. It really boggles my mind. It really does.

Now the logical side of the information when it comes to personal finance you can find anywhere. It’s not rocket science. All the personal finance experts say the same things over and over again and just use different words. The subject has been beaten to death.

Budget, save every month, differentiate between need and wants, invest in your 401k, pay off any credit card debt, don’t get into debt in the first place, save for a rainy day, etc.

Some people who are not aware of any of this but when they become exposed to it and apply it, do just fine.

Others are aware of all this information, yet they’re reckless with their finances and that falls into the emotional realm – consumerism, materialism, greed, low self esteem, etc. I’ve already covered a lot about the emotional side of money in previous articles so I won’t go into that here.

But I do want to go into the logic side again even though the subject has been beaten to death.

First off, the whole idea of budgeting is to get a very clear picture of where your money is going every month. What gets measured leads to improvement because now you have a tangible point to work off of.

Obviously your mortgage/rent and car payment is probably going to be at the top of the list but the rest may surprise you in terms of where your money is actually going and to actually see where it’s going, make a record of what you spend your money on everyday for one month and I guarantee the results will strike a chord within you.

Once you know where it’s going, you can start to change accordingly by directing where exactly your money flows to. Without that, it will get spent on anything without a thought.

When you draw up the budget and list all the bills and expenses you pay every month, determine which ones are needs and wants. You want to free as much cash as you can to start saving and paying off any debt you have so see if you can do without your wants until you’re on solid financial ground. Free up as much money as you can and start paying off your debts and start saving.

The easiest way to save your money is just to view it as a bill that’s just as important as your mortgage/rent. Put it at the top and take it from the top automatically every month. The rule of thumb is 10% of your take home pay but if you can’t handle that, start smaller.

Start paying off any high interest debt you have such as credit card debt as soon as possible as well with the money you usually use to buy the things you want.

Once you’ve done that, start saving for the rainy day you know will come and it will come. That’s life. They say you should have 3 months worth of living expenses saved but I say 6 months just to be on the safe side.

This advice is pretty fundamental and all but some may find that even though they trim their budget as much as they can, they just can’t seem to save a whole lot or make a dent in their debt. If you find yourself in that kind of situation, realize that there’s only so much cost cutting and saving you can do until you simply have no choice but to focus on the other side of the equation and that is making more money.

Get a second job. It doesn’t have to be a glamorous one. Just one to boost you financially until you’re back on your feet.

Start a small side business. Develop new skills. Help the bottom line of the company you’re working for. Gun for the new promotion.

And when the extra money comes rolling in, don’t blow it all away. Direct it toward your debt and savings.

If you’re married, don’t fall for the two income trap. When both husband and wife earn money, it’s really easy to build a lifestyle around the combined income.

For example, if both partners earn $50,000 a year each, a lifestyle of $100,000 a year gets subtly built. But then one of them will inevitably lose their job due to a recession, cutbacks, health issues, etc. and now they’re relying on one partner’s $50,000 salary to finance a $100,000 lifestyle. The credit cards come to the rescue and they soon begin to dig themselves in a pretty deep financial hole.

But, if you create a lifestyle based on one partner’s income and save and invest the rest, that’s probably the best thing to do to ensure your current and future financial situation.

When you’re at the point where you no longer have any debt and you’re six month emergency fund is fully loaded, you’ll find yourself with a lot of disposable cash every month, cash that was previously used to pay off your debts and to save.

And the beautiful thing about that part is that you won’t blow all that money away. Sure you may splurge here and there to celebrate your newfound financial milestone, but it won’t be over the top. Rather, you’ll probably continue on with the great personal finance habits you’ve developed and save a majority of it or invest it or even donate it to a worthy cause.

You’ll no longer feel as if you’re working for money.

You’ll start to get the feeling that your money is finally working for you.

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