Money Management & How To Save Money
Most everyone likes new ideas on how to save money. Thanks to advertisers and executives, the term “saving money” has taken on a life of its own. You’ll constantly hear ads like, “Think how much you’ll save!” or overhear friends say, “I couldn’t pass up this deal!” as they show you their newest tech device with a six-month lifespan.
“The art is not in making money, but in keeping it.”—English Proverb
Those social eyesores that read “BOGO” (buy one, get one free) or “50 Percent Off” certainly do not imply that anything is free, but the discounted sign gives you that warm feeling as if you’re getting something over on them. In reality, if you’re buying something you don’t need, then you aren’t really saving anything, you’ve just fallen into the budget planner trap door.
In this guide, we’ll cover the basics to help you discover the best ways available on how to save money, how to manage your money through money management, frugal living, financial management, how to budget money, and budgeting tips, along with a glossary to help you define what personal finance means for you.
Saving Money by Evaluating Circumstances
“Money looks better in the bank than on your feet.”—Sophia Amoruso, Founder of Nasty Gal
Many people spend carelessly with their home budget. Advertising agencies are spending billions of dollars each year to continue this trend and the ease of sliding a credit card certainly doesn’t make it any easier to pass up a “deal.” Before you can truly start saving your money, it’s best to take a second to look at your current circumstances.
Whenever you apply for an apartment or anything substantial, the banks will check your credit report. Much like the big banks’ evaluation, a self-check should be performed regularly to make sure no surprises pop up to hurt you in the near future. These self-looks can be the ultimate budgeting tip because you know where you stand, unlike other consumers who may spend blindly day-to-day.
First, check your bank accounts and credit statements to see which fees you are paying on a regular basis. Some obvious examples may be your rent or mortgage, car payment, gym membership, cable and Internet bill, water bill, student loans, insurance payments, and cell phone bill. Besides those fixed rate bills, there are also things to consider such as gas and groceries, or anything else you buy each week.
For an in-depth version of the listed items above, considering visiting a site such as monthlyexpensecalculator.com, which categorizes all these expenses and more.
Determining Needs Versus Wants
When deciding how to budget and you start to dig into your finances, it’s possible you’ll see all of your bad habits with big dollar signs listed next to them. In addition to expensive items like weekend trips, those occasional trips through the drive-thru and unnecessary splurges in the checkout line will start to add up as well.
Habits can be hard to break, but we’re dealing with ‘how to save money’, so if you’ve also got unnecessary ongoing charges, such as a monthly app you rarely use or magazine subscription you rarely read, it may be best to cancel those immediate wants to save up for future needs.
According to wisebread.com, your needs are as simple as “food, water, shelter, and not much else.” While those Caramel Macchiatos may seem like a need when you’re running late and didn’t get enough sleep the night before, unfortunately, that sweet treat is still just a luxury item. (For this particular example, consider making a replica at home like this three-step guide from Instructables).
Saying “No” and Being Realistic
In addition to fighting those pesky bad habits, it’s important to know when to say “No” to certain obligations and make sure that you’re being realistic with what you can actually afford. Frugal living is one of the best ways to save money.
It’s difficult to say “No” to your friends and co-workers. It’s fun to go out to lunch or grab a drink after work, but much like sticking with a diet, those bills add up as quickly as the calories do. Saying “No” is a great budgeting tip.
Rather than simply saying “No,” make a plan in order to keep a budget. For example, it’s easier to say “No” today when you have a future date on your calendar and plans to attend a fun, rare event. Not only does this make it easier for you to stick to your guns, but you can attend a more memorable event such as a concert, rather than a series of small events—such as ongoing, last-minute lunch plans.
Within this realm, it’s also a good idea to be creative with your outings. Rather than grabbing coffee, consider simply meeting friends for a walk in the park or find other local events, such as free live music. Find an affordable way to go out without having to turn your pockets out.
There are always occasions to celebrate. Make sure you’re celebrating the ones that truly matter to you. Be realistic with how much you can spend each month and do not allow yourself to spend more than that designated amount.
The Cash-Only Diet
“You must gain control over your money or the lack of it will forever control you.”—Dave Ramsey
One way to help yourself decrease spending and learn how to save money is to consider the Dave Ramsey Envelop System. On his blog, financial guru Dave Ramsey advises people to place set amounts in an envelope to make sure that amount goes towards it’s proposed purpose. This money management system is the key to personal finance.
As an example, he writes, “Let’s say you have budgeted $500 a month for groceries. When you receive your first paycheck of the month, write yourself a check for $250, cash it, and put the cash in an envelope. On that envelope, write ‘Groceries.’” Do the same with the second check of the month.
The most important method to the cash-only diet is will power. If you find that you have used up all of your “Restaurant” money, don’t reach into your other “Emergency Fund” and cheat yourself on something you truly need. Frugal living is one of the best ways to save money and envelopes are cheaper than credit card debt.
Create a Savings Account
After you’ve gotten a grasp on your spending habits, it’s time to start a savings account. In the beginning, a savings account feels like a slow crawl in terms of creating something substantial, but in the long run, it’s crucial. Visit your bank to determine common rates and find the best ways to save money for frugal living.
In a financial article on the Huffington Post, they advise for you to set up your income in a way that you save first, then pay bills, then use the remainder for fun. Most people do the exact opposite.
With this idea in mind, it’s important to find out how much you can save (somewhere between 12 and 20 percent), and pay your savings account before anything else. If the money is already set aside, much like the envelope system, then it can’t be touched.
Develop a Savings System
Also known as a financial umbrella, creating a system of savings can be as simple as the following list:
- Open a Savings Account
- Set a Reasonable Financial Goal
- Budget a Savings Routine
- Start Extremely Simple
- Readjust as Needed
The Varieties of Savings Accounts
Basic Savings Account
With low commitment, basic savings accounts are often as simple as setting up a checking account. Today, many banks even have apps that allow you to move money between the two effortlessly. This ease of transfer, of course, has its pros and cons. These accounts are often low interest but can help you divide up your income effortlessly with direct deposit.
Money Market Account (MMA)
An MMA may require a higher minimum balance than other savings accounts, but interest is often high and it has more flexibility than a Certificate of Deposit, or CD.
Certificate of Deposit (CD)
Similar to basic savings accounts, CDs are best for long-term saving goals. Their interest returns are better than basic accounts as they rise each year, but they are less flexible so you’ll need to leave the account untouched for three to five years.
“A boat can float in water, but it can also sink in it.”—Chinese Proverb
While interest can add to your savings, it can also add to your debt. It’s important to remember that interest is a fee charged for borrowing money, whether that’s the bank borrowing from you (maybe 3 percent), or you borrowing from the credit card companies (closer to 20 percent after introductory offers).
According to Brown University, interest “…begins to accrue, or add up when loan disbursements are made or credit is issued. Be it interest earned on a personal savings or checking account or interest accruing on federal student loans, private student loans, personal loans, or credit cards, it’s important for [everyone] to understand interest, how it affects them, and how to stay on top of it.”
According to Investopedia, the following terms apply to interest rates:
Principal: “used to refer to the amount borrowed or the amount still owed on a loan, separate from interest. If you take out a $50,000 loan, for example, the principal is $50,000, so if you pay off $30,000, the remaining $20,000 left to repay is also called the principal.”
Interest Rate: “the cost of borrowing money. Or, on the other side of the coin, it is the compensation for the service and risk of lending money.”
Capitalization: “in accounting, is when the costs to acquire an asset are expensed over the life of that asset rather than in the period it was incurred. In finance, capitalization is the sum of a corporation’s stock, long-term debt and retained earnings. Capitalization also refers to the number of outstanding shares multiplied by share price.”
Dealing with Debt
“By making college unaffordable and student loans unbearable, we risk deterring our best and brightest from pursuing higher education and securing a good-paying job.” —Mark Pocan, Politician
Much like knowing the difference between assets and liabilities, it’s important to know the difference between good debt and bad debt.
Good debt is investment debt that creates some type of value, that are tax-deductible and debts that produce more wealth in the long run.
The concept of bad debt comes in when talking of the purchase of disposable items or durable goods using high-interest credit cards and not paying the balance in full. Meaning, if the card balance isn’t paid in full, you pay interest, although the disposable or durable items that you purchased continue to lose value.
For young people, having a credit card that can be paid off monthly can help you acquire good debt. Consider applying for a card that pays back interest, rewards with gift cards, or provides airline miles, and then only use it for the areas that provide those points, such as gas or groceries. Pay it off on time, every time. Other examples of good debt include student loans, mortgages, and business loans, within reason.
If unattended however, that same credit card can lead to bad debt after the introductory period, if bills aren’t paid off like clockwork. Other examples of bad debt include car loans (since cars lose value over time), and consumer loans or personal loans, (which have extremely high interest rates).
Theoretically, it’s possible to pay a loan off over and over again in small increments, and never finish paying it off due to interest rates alone.
Getting Out of Debt
“We all think we’re going to get out of debt.”—Louie Anderson, Comedian
One of the biggest money management tips: After determining the good, the bad and the ugly, start to pay off bad debts immediately.
Avoid Unnecessary Debts
To avoid any future debts, get your personal finances in order and make sure to avoid any debts you don’t absolutely need. When applying for student loans, it’s easier to live on campus and pay ridiculous amounts of money for expansive meal plans, but those cafeteria meals get their own interest in the long run. If you can’t afford it, stick with cheap meals and an affordable studio. Rule number 1 on how to save money!
If you choose to purchase a car with specialized add-ons such as a lift-kit on a truck, consider paying for this addition later if possible. Adding on specialized features means that you will be paying off those upgrades for years and years to come. Instead, wait until you can afford to spruce up your vehicle and stick with the basics in the beginning.
Transfer Debt to Low Interest Options
While transferring a debt isn’t the same as repaying a debt (seeing as you will soon have new fees to deal with), it is possible to transfer one credit card balance to a new card that may give you 12 to 18 months of 0 percent financing. Within that extended period, pay off all or as much as you can before researching outside options.
This option is common in credit cards, but debt transfers can also occur for other loans such as car, appliance, furniture, or nearly anything else set up on a monthly payment. While these fees are inevitable and transfer rates can expire, transferring can save you hundreds if not thousands of dollars over time.
Understanding the Psychology of Debt
While finding the right tools to dig yourself out of debt is important, making sure you understand your viewpoint of debt is just as important. Whether your debt came from student loans, a medical emergency, or a shopping addiction, understanding the problem can help you find the solution.
According to MagnifyMoney.com, there are two types of debt repayment: Debt Avalanche and Debt Snowball.
Debt Avalanche: “starting with the highest interest rate and working your way down, which saves both time and money.”
Debt Snowball: “paying off small debts first to get the warm and fuzzies that will motivate you to keep going.”
In addition to their terminology, the website provides the following scenario: Let’s say you have around $10,000 in credit card debt with 18 percent interest. According to the management site, after placing as much money as possible down on the debt, they advise you to use your other good credits in order to make “banks work for you and get your rates cut.”
Save While You Pay Off Debts
It can be temping to put everything you have into the debt repayment plan, but if another emergency arises during that time, you’ll be right back where you started. Rather than putting all of your eggs in one basket, remember to keep saving your money along the way.
Many of the money management tips in this guide seem fairly simple. The thing about simple advice is that people often avoid it. Whether you’re paying off debts or trying to save for a first home or even a vacation, take the journey less traveled by sticking to your principles and follow the best path for you.
Whether you choose to save 12 or 20 percent, pay yourself first by putting that money away for a rainy day. While this guide gives a complete overall strategy, each and every situation is different, so it’s always wise to spend a lot of time planning and making adjustments along the way.
Any long journey requires ongoing adjustments and grit. As novelist E. L. Doctorow once said, “It’s like driving a car at night. You never see further than your headlights, but you can make the whole trip that way.”
As If That’s Not Enough
The web is chalked full of places to look for savings! One of our favorite places to frequent to get awesome tips is Save Money Guide This site has multiple links to help us all save money, something we can all benefit from.