10 January 2008

Stop crying, Start saving

There is plenty to be said for our country's historical lack of economic direction, rational thinking, and abundance of corruption and mismanagement. There is also something to be said for the value of sound financial management on the individual level.. I know, your salary is crap (and so is mine). Until the government wakes up and does something to save the economy (not just subsidize inflation), maybe you should consider doing something to prevent your finances from going down the drain. I will give it a try at least. Here are my favorite saving tips from money management:

#1 Treat yourself like another entity and pay yourself first.
This is one of those classic savings approaches that we can easily employ. If we imagine ourselves as someone as important as any other creditor we have, then we can deploy payments to our own accounts on a regular basis just as we do our own bills. Set up an arbitrary savings amount — a good rule of thumb is at least 10% of earnings — and stash it in a savings account each month. I find 10% a good start to a savings plan but a stretch goal should be something higher, such as 20% or more of your income. Another term for this activity is “tithing yourself” and is a great habit to develop.

#2 Automate your savings.
Direct deposit is one way of ensuring you get your money safely into your account without worry. Without it, I tend to second guess myself wondering if I’ve received all my pay checks and whether I’ve deposited them all. Direct deductions are a superb way to channel money into savings.

#3 Pretend you didn’t get a raise.
So you were lucky enough to secure a raise! Congratulations! Now if you’re able to pretend you never received it and instead sock this additional money away especially in an investment account that compounds with time, you may surprise yourself further down the road with a substantial nest egg. I agree, not being able to celebrate a raise may not be that much fun, so use a small portion of it to reward yourself (but I’d avoid those big ticket items)!

#4 Pretend you haven’t paid down your debt even if you already have.
You may be accustomed to paying down debt, but the time will come when you’ll have paid them all down. When this time comes, you may find yourself with money freed up raring to go elsewhere! This is a great opportunity to route this “newly found” money towards a savings account for your goals.

#5 Bank the savings you receive from coupons, sales and discounts.
Sales can save you a bundle, so how about writing yourself a check each time you score some savings while shopping? If you were prepared to pay full price but discover a savings of 10%, bank the 10% you save into your savings account. This could be a painless strategy of building up your nest egg that you incorporate into your daily shopping habits.

#6 Open investment accounts and automate contributions.
Learn about how to invest your savings. The next step beyond saving your money is to find a way to make them grow. Once you are comfortable with investments, you can open accounts and actually set up automatic monthly contributions to these accounts. This will help you take advantage of the concept of dollar cost averaging, a powerful way to grow your money.

#7 Create secondary sources of income.
If you are able, exploring other ways to supplement your income should help boost your savings. By increasing your income, but keeping your expenses the same or lower, you have more money freed up to line your accounts. I especially like to hear about how secondary income sources come about by accident, as when someone has a hobby that turns into a business, or when someone fortuitously stumbles into an income generating project they actually enjoy doing.

#8 Cut down on impulse buying and avoid unnecessary purchases.
Just say no to that inner voice in your ear telling you that you can’t live without the attractive XYZ sitting on the retail shelf. If you give yourself a few days to mull over your buying dilemma, you may realize quickly it’s not something you really need and you’ll forget about it in a few days. Get yourself distracted with other matters as much as possible!

#9 Reinvest interest and dividends from investments
This one might be a strech in our Bahrain context but why not, if you have them: reinvest any interest and dividends and give your investments a chance to build.

#10 Use unconventional savings vehicles
This is controversial and may not be the best way to save but could be the only ways to save for some people or “non-savers” who lack the discipline to set aside money any other way. For instance, if you have insurance policies tied to savings vehicles, you may consider these relatively more complex programs rather than simpler insurance plans, in order to effectively “force” yourself to save. Examples of unconventional savings vehicles include universal or whole life insurance, annuities, or even real estate, which allow you to make monthly payments towards a fund or goal.

And of course, the classic for Bahrainis: don't get a loan! Just don't (unless it's for some emergency-related expense). Remember also that getting a nicer car or throwing a jolly wedding party do NOT qualify as emergencies!


ammaro said...

thats great. our society has been burdened with loans and the lack of any sort of financial understanding, so our citizens end up learning the hard way. i wrote a series on financial planning a while back, its on my site on the right hand column (fixing your money probs). you might find it interesting :) thanks again

Vampire D said...

Another point is that in the school or University’s don’t teach you on how to finance your life once you start working. Therefore a lot of people fall victim and miscalculate the power of interest rate on personal loans and credit cards.

Anonymous said...

والله هالاشياء صعبة بس ما عندنا خيار ثاني

وفامباير معالك ألف حق.. ما علمونا شي نستفبد منه

SoulSearch said...

You're absolutely right. We don't have it in our culture/mentality to save for a rainy day. I hae been workng for the past 12 years and I only started saving 3 years ago. Its sad but thank God I finally got some sense into my head! My brother has just started working and he's already thinking of getting a loan for a car, I've been trying to convince him otherwise. Maybe I should send him the link to your post and to ammaro's. Thanks guys, you've got us thinking what our teachers should have told us!!!

LuLu said...

Ammar, thanks for pointing to your post and it is pretty useful..

Vamp, anon & soul.. thanks for passing by. Please spread the message of saving :)

Dilshad Khan said...

Great thinking