This is a guest post from Pauline of InvestmentZen.com
We are just over two months into 2017, and what better way to finish that first quarter than by setting the foundations for a strong financial year? With these five easy money moves, you should find enough room in your budget to save, invest, and even have fun!
Plan your year’s budget
Often, when you feel like you are living paycheck to paycheck, it is because you are failing to plan ahead. There will be emergencies every month. Or at least some unplanned expenses. Which could be as small as having to buy cough medicine when you’re sick or as big as a car replacement because yours broke down unexpectedly.
But the good news is, most things can be planned into a yearly budget. You should start by listing all your regular expenses, such as your rent or mortgage payment, utilities, internet and phone bill, grocery budget, gas money, insurance premiums, student loan instalments, credit card payments, and so on.
Now add to that the sums you should be saving every month. Let’s say you want to go on a $1,200 holiday once a year, you need to save $100 each month to afford it without having to use your credit card. $600 for Christmas? That’s $50 a month. Think about the months where you have to spend more, like when you pay your car insurance in one instalment, or have to buy school supplies for the kids and sign them up for karate in September, and plan ahead to make sure by then, you will have enough money to pay cash for everything.
Optimize your rates
The rates you are getting on your savings and investments, and the rates you are paying on your debt, can have a big impact on the growth of your net worth. Save $50 per month for 10 years at 1% or 2%, and you will have $6,312 and $6,647 respectively. A $300 difference just for getting one extra point worth of interest.
The same applies when you are paying double digit interest on your debt and are able to get a balance transfer for 0% for the next 12 months. A $1,000 balance transfer can save you $150 per year if your previous rate was 15%!
You can call your credit providers and ask them to lower the rate, or if they won’t help you, shop around and find another company that would be happy to have you. Make your money work hard for you. Do the same for your mortgage, and save thousands of dollars over the life of the loan by refinancing. If you keep the same nominal payments every month, you will be overpaying your mortgage and cutting its term by a few months or even years.
How boring is it to think about money all day? And this is a money geek speaking. I love to automate everything in my finances so the repetitive tasks are taken care of. I ask to get paid by automatic debit for recurring monthly payments, like rents from my tenants. My mortgage, utilities, broadband and taxes all get automatically deducted from checking at the beginning of the month as well.
And I set up an automatic transfer to my savings and investing accounts for sums I know won’t put me in the rest. Any money left on the account is mine to spend as I please. If there is anything left at the end of the month, I make a manual transfer into an instant access savings account. That is the one manual thing required on my hand. Believe me, removing the minutiae and the willpower from financial decisions is one of the best moves you can make this year. Counting on your future self not to spend the money available, AND save it at the end of the month is a risky move.
Have a long term plan
While it is great to plan for a strong 2017 financially, the end goal is a comfortable retirement, being able to buy that house you want, putting your kids through college, … whatever big expensive life events you have ahead of you. And they’re all expensive.
In order to receive a $40,000 income in retirement, based on a safe withdrawal rate of 4%, you will need to have one million in the bank. That will be very hard to achieve with a regular savings account. If you open a brokerage account and start investing today, you would need to save $500 a month for the next 34 years to make it work, assuming an annual rate of return of 8% (just under what the S&P500 has returned over the past 30 years on average).
I know that saving $500 a month is not easy for most people. And we are just talking about covering retirement there. Not the roof repair, the wedding or any major things you’ll have to pay five figures for over the next couple of decades.
See why you need a plan? Try to get a few high yield savings accounts on top of the brokerage one, to park money you will need in the near future. And invest any sums you can afford to leave untouched for the mid to long term.
Before you know it, compound interest will work its magic and your net worth will grow faster.