*Sorry this didn’t post on Friday. I guess auto post didn’t work*
Last week we discussed debt repayment methods and I challenged you to take a look at your own debts and the ways that you could supplement your payoff plan to speed things up.
This week I quickly wanted to look at the benefits of making your savings and debt repayments automatic.'
I don’t know about you, but when I check my bank account balance at the end of the month, it’s almost always less than I expected to see. I forget sometimes how the small amounts I spend here and there can add up to some big costs. If I wait until the end of the month to pay our debts or put money into savings, chances are my intended amounts will have been eaten up by, well, life!
At the end of the day (or the creation of the budget!) it comes down to what your priorities are. Would you rather be spending your money on 5 dollar thrills that add up to a whole lot of nothing, or would you rather be paying off debts and building your savings? If your attitude is tuned towards your long term financial goals, it would make sense to consider saving and debt repayment as one of your first expenses, behind things like your mortgage, electricity/heat and transportation and perhaps sacrificing your less important expenses to give you a head start. Cell phone plans, cable and internet are all non-essential home expenses that you could consider scaling back or cutting out altogether for a season. Our cable/internet bill is around $150 a month; if we cut those services and instead banked that money, it would mean $146000 in savings at retirement if we just left it in our savings account (3.25%) and contributed only the $150.
How it works
David Bach, the author of The Automatic Millionaire and the Finish Rich series, told a story about a couple who never made more than $50000 their entire working lives, yet somehow managed to own two homes (simultaneously), pay for all of their kids college education, and have a net worth of over a million dollars. How did they do it? They made it automatic.
Every month or pay check a designated amount of money is transferred from your chequing account into your savings or investment accounts and towards your various debtors (with minimums being paid on all except one). Don’t contribute so much that you end up running out of money for other things, but don’t be afraid to cut back on a few things to boost your savings either. A little bit in the beginning can mean a lot of savings in the end!
Consider this example: Assuming a 6.5% return (middle of the road in terms of risk/return) and a $300 a month deposit into savings.
Starting Age Total at Age 65
Saving $300 a month for 10 years only contributes $36000, but the compounding interest means an extra $350000 if you start saving at 25 instead of 35.
Worried because you didn’t start saving early? Let it go and do what you can to start now. Every month that goes by is an opportunity lost to cash in on that interest earned. Start today!
This Week’s Challenge:
How important is savings and debt repayment to you? If you don’t intentionally make these things priorities in your budget, your money won’t be making as much of an impact on your financial future. This week look into savings accounts at your bank or check out ING Direct. If you’re in Canada, now is a good time to open a TFSA. Come January 1st, you’ll have room to save $15000 tax free. Once you’ve figured out how much you’d like to put away each month, look at a calculator like this one and see how much you’ll have saved by the time you plan on retiring.
Next week is the final budget planning challenge before we begin 5 weeks of budget stretching tips. Check back next week for some final budget tips and a look at how it all ties into your financial future.