Saving
money is always a challenge. The first step to setting up a savings program is
to find out how you are currently spending your money. To start, I would
encourage you to use Quicken or mint.com
which will help you get a better handle on where your money is going. Once you
know what you are spending your money on, you are in a better position to
redirect some of that money towards savings.
A
great exercise I use is to have couples look at each item as essential or
discretionary. Once you decide which items are discretionary, I recommend that
each person separately look
at the discretionary items and rank them in importance from 1 to 3. Then, I
recommend that they go to a public place like Starbucks or a restaurant and
look at each other's list (everything stays more civil if you meet in a public
place). The ground rules are that if an item is ranked 1 in importance for one
person but a 3 in importance for the other partner, it is off-limits. However,
if there is an item that is a 2 or 3 for either person, you can definitely consider
redirecting that money towards savings.
Another
recommendation is to open multiple online savings accounts for different
purposes. Looking at your last year credit card bills will give you a great
idea of what short term spending items are recurring yearly. For example, consider
setting up a slush fund for vacations, holiday spending, etc. An automatic
monthly savings plan that you can fund regularly can help you be more
disciplined in your savings activity. Paying for items or occasions in advance will
help you avoid building up credit card debt and less likely to sabotage your
long-term savings plans.
Another
recommendation is to switch to a 15 year mortgage instead of a 30 year
mortgage. I recommend this with clients who have already had a mortgage for a
few years. Often by then, they have a lower amount of principal on their loan
and it may not be a substantial difference to pay. This is a great move for
clients to make when interest rates have come down since they first took out
the mortgage.
I
also advise you to round up your mortgage payment to the next round number. If
you can afford to, I encourage you to pay one extra payment per year on a 30
year mortgage. It is surprising how quickly you can make a difference if you pay
one extra payment per year on a 30 year mortgage. Paying an extra principal
each year can reduce the time it takes to pay off the mortgage considerably.
If
you would like to discuss this further, please feel free to call my office at
201-843-0044. Also, I recommend you check out our website at:
www.wattersfinancial.com for further
information concerning financial planning and wealth management topics.
Timothy
Watters, CFP
