When it comes to saving money, everyone has heard the mantra “pay yourself first,” but this is not easy to do when you work for a company that doesn’t offer steady pay or an automatic “pay yourself” option with direct deposit.
“When you’re faced with a job and an income stream that is ‘lumpy,’ commission-based or paid in cash, the onus is really on you to follow a financial game plan,” says Brad Stroh, co-CEO of Freedom Financial Network, a consumer debt-resolution company based in San Mateo, Calif.
1. Automate yourself
Even if your employer doesn’t offer deductions to an automatic savings plan, set it up yourself with your bank accounts. “Don’t just keep your funds in a checking account with a mental note that they’re ‘saved’,” says Stroh. “Instead, put them in an investment or savings vehicle that you determine beforehand.” For example, set up your checking account to automatically transfer $100 into savings on the first of every month, without any additional effort on your part. You have the power to cancel a payment, though you may have to give plenty of advance notice to do this. But this extra step forces you to do more work if you choose to stop paying yourself.
Some people may not be able to completely automate their savings, but the benefit will be the same if they follow a savings routine. “My company pays me in cash (after taxes), so I don’t have the automatic deposit option,” say Bree Shannon, a Long Island, Calif.-based singer for a cruise line. “But I do write myself a check that goes into my savings account every pay (period).”
Whether you initiate an automated process or write a check, following a routine plan is the best way to save, says Lewis Mandell, professor of finance and managerial economics at the State University of New York in Buffalo. “It forces you to live on less money, which means that you scale down your expectations,” he says. “After a while, you don’t even notice that you’re not spending as much.”
2. Automate your debt
People are often more willing to pay their creditors than pay themselves. So even though your “income” isn’t automatic, your “outgo” probably is. You can use this to your advantage, though, by setting up an automated electronic bill payment schedule for your debt. “If you have credit card debt, you need to pay it off. You’re saving by paying that debt down,” says Peter Bielagus, a financial adviser and author of “Getting Loaded: A Complete Personal Finance Guide for Students and Young Professionals.”
“If you have $1,000 earning 4 percent (in a savings account), whereas your credit cards are losing 18 percent, then I’d much rather you pay down $1,000 on your credit card.” Once the debt is paid, you can transfer that same monthly payment into a savings account.
3. Open CDs
Each time you get paid, open a three- or six-month certificate of deposit with a portion of your earnings. Check out the
highest-yielding CD rates on Bankrate. Savings institutions usually require a minimum deposit of $1,000, but some accounts can be opened with only $500. Then renew them each time they expire. “If you constantly roll these CDs up (at the end of their terms), then you’re constantly investing,” says Stroh. You will likely be ahead of people who have direct deposit, especially if they park their money in a regular savings account with a low interest rate. And since these CDs are short-term, you can still access your cash in a reasonable amount of time should you face an emergency. “All you want to do is make it as hard and unpleasant as possible to get to your money,” says Mandell. But don’t make it impossible.
4. Start low, finish long term
Some people don’t save because, after expenses, they feel they can’t budget hundreds of dollars a month into a savings account. “But the point is to get started,” says Bielagus, even if you start with a very low amount. “If you begin with $25 a month, and then after four months you increase it to $30, and four months after that increase it to $40, pretty soon you’re going to be saving some serious money.” Keeping a long-term view helps you realize the value of a small start. “You might not be able to predict your income for the next three months,” says Stroh, “but you may be able to predict your total income stream for the next several months and years. Your budgeting, spending and saving should be done with that in mind.”
5. Go for zero-based budgeting
The flip side of starting small with savings is to start small with necessary expenses. “Sometimes it’s helpful to adopt an approach of not purchasing more than is absolutely needed until you’ve saved up the money,” says Stroh. This method, called “zero-based budgeting,” ensures that the focus is on how big your savings is each month, not how much you can spend. For example, instead of giving yourself a monthly clothing allowance, you may choose not to spend money on clothes at all for several months. Then, on a few occasions, you would tap into your savings to make clothing purchases. “It’s more a matter of how much extra savings can be built up, and then using that savings toward a planned seasonal purchase,” says Stroh. Sure, you are going to have a specific set of expenses each month such as rent or mortgage and food, but for discretionary purchases, practice saying “no” as you watch your savings grow.
6. Get real with your goals
You can’t know if you’re saving enough unless you determine in advance how much you want to put away, and that means setting targets. “When I go to bed, I have a legal pad next to me that lists my savings goals,” says Bill Warren, a Realtor in Richmond, Va. “I’m constantly reviewing them.” If you are not sure how much you should be saving, take a quick look at your last bank statement. Which types of businesses received the most of your money? How much did you spend with those businesses? Make that dollar amount your new monthly savings goal. You are more important than the services those companies provide.
7. Kid yourself
“If you cannot save for yourself, open up a savings account in the name of your kids,” says Mandell. He reasons this is a great psychological way to stockpile savings when you have been unsuccessful doing it for yourself. “As long as the amount in the account is low enough to not be taxable under the
kiddie tax law, it is a great way to save.”
One way to avoid the kiddie tax altogether is to invest in tax-deferred 529 accounts for your children’s future educations. These college-savings plans can be set up to accept payments automatically from your bank account, making saving a painless effort. True, there’s a penalty if you tap into these accounts for noneducation purposes, but in a sense you’re saving yourself the hassle of coming up with the money down the road when your children matriculate — and better yet, sparing them from having to take out onerous college loans.
8. Spend more on your house
No, don’t buy a bigger house. Just pay more on your mortgage. “Take out a 15-year mortgage,” says Mandell. “This is an absolutely terrific way to trick yourself into saving.” Instead of having your savings parked in stocks and bonds, it’s parked in your real estate.
“I always recommend getting a shorter mortgage if you have difficulty putting away money. When my wife and I bought our first house, we obligated ourselves to make a payment that used up a very large part of our income,” says Mandell. “We paid it off over three years. When you’re obligated to make large house payments, you’re obligated to save.” Though large principal payments are a great way to create equity, Mandell does sound a warning: “Whatever you do, don’t open up the other end of the package by taking out a home equity line of credit, or HELOC, because that undoes everything!”
9. Bank your bonuses
“When I get a bonus or holiday pay, I act as though I didn’t get it and put the extra in my savings account along with what I regularly put in,” says Shannon. Stroh agrees with this method. “Human nature is to spend (a bonus). A lot of consumers get lured into making purchases with it,” he says. “But you really want to invest it.”
10. Celebrate regularly
Keep a running tally of the amount of money you have saved, or paid down in debt, since the beginning of the year. As this figure balloons (or shrinks), it will help inspire you to keep up with your savings plan.
If you can succeed in your job, you probably already have what it takes to save regularly. “Many people (with irregular incomes) tend to be pretty good savers, because it’s the only way you can survive in a job like this for very long,” says Mandell. “Once you can get your money removed from your direct control, much of the battle is won.”
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