I’m often talking to friends about different investment vehicles or investing in general, and I cannot remember how many times they have at some point said “yea I would invest my money too, but I can never save” or “I never have money to invest”. They don’t understand how they should be setting money aside.

People generally think that to save money, you first need to have a budget. So they figure out where they are spending money and how much they are spending. They may even get as far to set boundaries for different categories of spending. However 99% of the time they will drift away from the budget, and sometimes for good reasons. Budgets don’t take things like sudden expenses and increasing costs into account (unless you are constantly updating it).

The budget approach doesn’t work, and there are millions of people around the world who can agree with this. So how should you save then? First we need to select a savings rate, this is the amount (%) of your income that you want to save. If you start out early enough a 5% rate may be suitable, but if your needing to save for retirement in a hurry you will need a more aggressive approach, possibly 15%.

Now that you have your savings rate you need to figure out what this equates to for each pay check (or cheque if your from some places like me). Say you get paid on the 1st and the 15th of each month for $2500 each time. So $2500*5%=$125, you should be saving $125 twice a month. Now I’m not going to lie that sounds like a hassle, and it is! Thats why you should go to the bank and tell them to automatically withdrawal $125 on the 1st and 15th every month and place that money in an investment account (where you can invest it in funds, stocks, GICs etc. more info on these in the future). Thats not even $5 a day (the cost of a quick lunch or movie ticket), if this is all it costs to retire on time and comfortably, can you really say no?

By the end of the first year you will have saved roughly $3178.99, at 12% interest (note: I used an approximation for the interest per period). Even if you didn’t earn 12% interest you would still have set aside $3000.

Thats all you have to do, easy isn’t it? On the surface it may look like a budget, but you will soon realize it is not. Your saving money you never even had the chance to spend so your not going to miss it. Its easy to follow since you can’t spend money you don’t have.

The average American has a negative savings rate, believe it or not, use this strategy to separate yourself from the pack and build a better future.

NOTE: I’d like to thank Lazy Man And Money for mentioning this blog in his latest article

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Filed under: Saving