Knowing how to save money is the foundation for financial success. It is the root of what separates the rich from the poor. For most people saving money is not easy. Clearly, it is much more natural to spend money than save it. Since saving is not natural, it is something we must learn to do and work at. Saving money over a lifetime requires conscious effort and continued awareness so that it becomes a habit.
Are you a spender or a saver? Regardless of the answer, most of us could all use a little more savings so here are my principles for saving money.
Know how much you make and how much you spend.
The starting point for any financial goal is to understand your spending patterns. Study after study shows that wealthy people know where they spend their money. They either budget or track expenses. Just knowing how much you spend and where you spend your money sets the foundation for a sound financial plan.
Pay Yourself First
Next, is to simply get started. Start an automatic savings plan. Have money come automatically come out of your bank account or off your paycheque. Most people spend first and try to save what little they have left over. The best plan is to save first and then spend what you have left over.
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Understand the magic of compound interest.
Compounding has often been referred to as the eighth wonder of the world. Quite frankly, if you really get compounding you will understand the next two principles. The key to understanding compound interest is once you get enough money working for you, you then no longer have to work for money. It's truly amazing.
Start savings sooner than later.
One of the most common things I hear about saving is “I wished I would have started sooner.” Rich or poor, it's something everyone says. If that's the case, then don't let anything stop your from starting a savings plan. Stop the procrastination. It's never too late to start.
Something is better than nothing.
How much should you save? Any financial planner can run some numbers and tell you how much you need to save with the right assumptions. Even if you don't have a financial planner, you can find many financial calculators on the internet. As far as I am concerned, the amount matters less than getting a savings plan started. You've got to start the habit. Never let any hurdles get in the way of getting you started. Remember something is better than nothing and more is better than less.
Stay disciplined, be aware and get rich.
Saving money is hard work and don't let anyone tell you otherwise. In a consumer world, it is so easy to get lured into spending your money on the next thing. I've always said that saving money requires three key things: effort, awareness and discipline.
For most people, get rich quick is a low probability event. Instead, put your effort into the one strategy that is boring but has a proven track record to success. Get a savings plan in place. Worry less about where to save the money and what to invest in. Get the savings habit in place and once you have money saved, then worry about how to maximize your returns.