Like it or not, we're all CFO of our own personal economies. We have good quarters and bad ones, we have shortfalls and surpluses, and a file cabinet full of everything from tax documents to lawnmower receipts.
If you've been following what are generally regarded as “best practices” when it comes to getting your financial house in order now that you've started your career in earnest, you should already be well on your way to paying off any consumer debt (if not all the way there), have a 3-6 month liquid emergency fund at your disposal, and be contributing as much as you can to retirement account(s). All of this advice assumes that you're already doing these key things and that the only money that even makes it to your checking account is after retirement and other savings has gotten its piece.
Once you're in the rhythm of saving, it starts to get easier, just like how your motivation increases when you start going to the gym. Day-to-day success makes you not want to sacrifice the progress you've already made. But just like at the gym, in order to progress you have to step it up a notch from time to time. That's where these simple tips come in.
1. Have a checking account for just the bills.
Most banks let you open a checking account for free as long as you keep a minimum balance (often $100 or lower). By opening a separate checking account (hereby referred to as “the bills account”) and linking it to your everyday account, you've created yourself a “bucket” in which to transfer money to be spent on bills and bills alone. Let me repeat that: bills and bills alone.
Let's say your monthly cable and Internet bill is $100. Simply transfer $100 from your everyday checking account and when the time comes, pay the bill against your bills account. Doing this with all recurring monthly expenses will make it easier to differentiate between “spendable” money and money to keep the lights and heat on. This little trick turns your Jack of all trades personal checking account into your discretionary account. This will facilitate numerous good spending habits, including number 2…
2. Pay yourself first, and also second.
“Pay yourself first” is an old piece of personal finance wisdom. What it essentially means is, before going out to eat or buying yourself the latest gadget, or even before paying bills, put aside money from every paycheck towards your retirement or another long-term savings vehicle. Automatically if possible.
Paying yourself second is an addendum to that old adage. With your personal checking account now only used to keep spendable income, get in the habit of throwing an extra chunk of change into savings when you're flush and unlikely to notice, like on payday. It's truly amazing how fast an extra $50 or even $25 per pay period can add up when thrown in a savings account and forgotten. An extra $25 per paycheck over the course of the year (assuming bi-monthly paychecks) totals $600, and I guarantee you'll never notice it's “missing” at the time. That would certainly put a nice dent in your holiday shopping.
3. Round up, and watch it build up.
Chances are your regular monthly bills aren't nice round numbers like the above example. So when it comes time to transfer money from your personal checking to your bills account, get in the habit of rounding up to the nearest $5 (or even $10). Say your electricity bill is $88. Round up what you transfer over to $90 or even $100. Then when you pay the bill against your billing account, the remainder stays behind, essentially forgotten. Again, the trick is about separating you from your money in increments so small you won't notice at the time, but will be thrilled down the line when you need it.
4. Attack the principal.
If you're financing a car, depending how the loan is structured your monthly car payment is probably divvied between your principal and your interest. Meaning every payment you make not only chops off a slice of the car loan itself, but a portion of the interest you're being charged. You can work around this by paying an extra amount mid-cycle, which more often than not goes directly against the principal. If your car payment is $200 a month, and you pay an extra $50 on top of that between monthly payments, you'll not only pay off your loan quicker, but likely save a healthy amount on interest in the process. Find out from your lender before attempting this as some companies don't allow you to make principal-only payments like that (I wonder why?).
5. The cushion is your friend.
One of the most financially liberating feelings is having a cushion in your everyday checking account. It could be $500, it could be $1,000. Whatever you can afford, work on building up a permanent cash cushion in your checking account. Consider that amount your “$0” and never let it dip below that number. This cushion is your first line of defense against over spending, and will decrease your reliance on credit cards. Think of it as your own personal line of credit where you are the creditor as well as the debtor. If you're out to dinner and your share of the bill is more than you've budgeted, you won't be overdrawn and you won't even have to check your balance to see if you can cover it. The cushion will protect you. With each paycheck, the cushion is automatically replenished on months when you dip below your “$0”, as long as you consistently keep it at or above the size of the cushion you decide is right for you.
6. Gamify Your balance.
Back to the gym analogy, a big motivator for regular gym goers is making gains. If you could bench press 175 today, and are up to 200 next month, that's something to be psyched about. The same principle applies to your checking account. If you successfully build up a $500 cushion, you can make it a goal to bump that cushion to $550 or $600 the next time you get paid. By using the bills account you'll be able to get a bigger picture view of your discretionary money until your next paycheck, and can therefore more easily limit your spending by promising yourself to leave, for example, $600 in your checking account on payday instead of $500. If you keep upping the amount left over at payday, you'll increase the size of your cushion while better controlling your spending between pay periods at the same time. By turning it into a game of sorts, and striving for a better and better “score” it gives you a visible goal to beat month after month.
None of these tricks are rocket science, but any of them are scalable depending on your income. The numbers quoted in the above examples are just that, examples. Using any or all of these tips if you're able to, at whatever scale, should help you beef up your savings goals painlessly.