Saving Your Savings in 3 Easy Steps


Image by 401(K) 2013

Statistic from Thomas J. Stanley, the author of “The Millionaire Mind” and “The Millionaire Next Door” show the following:  86 percent of people who spend money on luxuries like expensive cars, jewelry, and electronics are non-millionaires trying to act like millionaires by purchasing luxury brands.

Instead of spending money on more “stuff” the rich – at least a large portion of them – prefer to save a dollar rather than spend a dollar. There is a lesson for all of us.

It appears the wealthy have discovered the power of saving and instead of spending their time trying to “keep up with the Joneses ” they choose to live below their level of income and save and invest the rest.

So how can those of us who have been on the spending side of the equation learn to save? Here are 3 ways to protect you from overspending and to save your savings!

Save a minimum of 10% of your gross pay

If you’re not in the position of saving 10% of your gross income right now, that’s fine. How about making 10% your goal and creating a plan that will allow you, over time, to get there? Focus on what you can do, not on what you can’t do! The key is to have a doable, written plan you can follow.

Your goal should be to set aside at least 10% of gross annual income every month for both your short-term and long-term needs. A portion of it may go into a retirement fund while the rest into a regular savings account.

Short-term goals should include having a $1,000 emergency fund, 3- 6 months of living expenses, a vacation fund, a Christmas fund, etc. Your long-term goals should focus on retirement, car replacement fund, and college funds for your children, etc.

Spend less than 25-30% of your gross pay on your mortgage

Buying more home than is needed or more home than we can afford has plunged many into situations of short sales, foreclosures or having to work tirelessly only to keep the mortgage going.

Here is another interesting statistic from Stanley: There are 1,138,070 millionaire households in the US living in homes valued under $300,000.

What’s obvious by looking at those statistics is that, quite a few millionaires are living in much less home than they can afford. Instead of spending enormous amounts of money on more home than they need, they save and invest their resources in order to have enough financial liquidity.

Are you living in more home than your current income can handle? Is paying your mortgage putting a lot of financial stress on your monthly cash flow? If that’s you, here are few suggestions to stop your home from being a money drain and turn it into an asset that allows you to save.

–       Is it time to sell and downsize? Depending on your financial situation you may have to consider this option in order to create financial breathing room. The decision to downsize should not be taken lightly. There are many factors to consider, such as your current equity, the housing market in your area (how easily you could buy something smaller and at what price), the interest rate on your existing loan versus the current interest rate, etc. If you need a little inspiration, here is a great story of a family that decided to dramatically alter their lifestyle in order to regain financial breathing room!

–       Can you rent out part of your space? Those who own homes with basements may be in a perfect position to use that space and generate rental income. With few slight modifications and adjustments you could turn your “money drain” into a “money maker” and earn additional $300 – $600 a month. As you consider renting part of your home don’t forget to check with your insurance agent in order to get appropriate coverage. In general you’ll have to report this income on your taxes but you’ll also be able to take advantage of tax deductions and you’ll be able to depreciate the rental unit and the furniture and equipment you install in it, as well as deduct a prorated portion of your mortgage interest, qualified mortgage insurance premiums and real estate taxes.

 Don’t let your “ride” become your financial downfall!

Would you like to guess what car Mark Zuckerberg, the CEO of Facebook, drives? A good old Acura. That’s right, a young billionaire (worth over 6 billion dollars) drives a $30,000 sedan even though he could easily afford the most luxurious car out there. If he can do it, why can’t we?

So why do you think it is that a billionaire is content driving a $30,000 sedan while many of us with annual family incomes of $45,000 – $65,000 feel the need to purchase vehicles with price tags nearing or exceeding 50% of our annual household incomes?

You may not be in a position to purchase your car with cash right now, but purchasing a cheaper vehicle with lower monthly payments will eventually allow you to set aside a “good chunk of change” in order to purchase another vehicle out right!  By simply setting aside $200 a month towards your next vehicle, you could have $7200 saved in just 3 years.  If you did it for 5 years you’d have $12,000 for your next ride!

Here are few basic checkpoints for making a major purchase, like a car:

1. What will be my TOTAL cost after paying the price and interest rate combined? Don’t be fooled by JUST your monthly payment amount.

2. How will the payment impact my monthly cash flow?

3. What if I lost part or all of my income tomorrow? Can I still afford to pay for that item at a lower income rate?

4. How will this purchase impact me long-term?

In order to see great results from saving, you have to understand that it’s a long-term proposition.  You can, however set smaller, short-term goals like saving your first $1000 for emergencies or saving 3-6 months of your living expenses in order to experience wins along the way.