Beginner’s Guide to Saving Money

We think the best investment advice anyone can give you is this: Save as much money as you possibly can and make saving your number one financial priority.  This is the fundamental underlying concept behind everything we advise here at RichmondSavers.com.

It all starts with saving money.  Stop buying useless garbage you’ll never use, expensive cars and homes to impress your friends, and the latest phone or gadget (when your old one works perfectly well) and start concentrating on becoming rich on a middle-class income.

Make Savings a Priority

We know most people feel stretched to the financial bone as it is and can’t imagine ever being able to save money, but it really isn’t that hard to do.  You just have to make it a priority and start saving today.

Look for ways to cut out unnecessary expenses in your daily life and set money aside automatically before you ever get your hands on it to spend.  Try to make a game out of saving: find ways where you can look and feel exactly like the guy next door but where you’ll end up rich and he’ll continue struggling.

You need to stop looking at people who have expensive cars and homes as “rich”; most of those people are dirt poor by our definition because they are up to their eyeballs in debt and their net worth is in many cases minimal or even negative.  So the guy with the $500,000 McMansion mortgage driving around in a 3 Series BMW with a $35,000 car loan and no money in the bank is poor, not rich.  Most people just see someone with a big fancy house and an expensive car and automatically think they are rich, but we know better.  That’s a poor person pretending to be rich.

Whereas the waiter who shares an apartment with two friends, has no car loans and stocked away $25,000 is rich, not “just a waiter” living in an apartment, as conventional wisdom would suggest.

Why you should Start Saving

Very simply put, life is so much easier and less stressful when you have some money in the bank and no credit card or student loan debts hanging over your head.

With money in the bank you never have to worry that you can’t fix your car or buy a new appliance if something breaks.

You don’t have the constant stress of wondering if a check is going to bounce, if you can make the minimum payment on your credit card, if your next ATM withdrawal is going to overdraft your account or if you’ll get paid in time to send out the handful of bills you’re holding onto.  All of that just adds constant stress to the average person’s woeful financial position and makes the dire situation even worse.

You can make better career decisions when have money in the bank.  You have a lot more psychological power over your job when you know you don’t “need” it to pay the bills next month, the month after that or even the year after that.

You don’t have to think like a poor person who is always worried about the total dollars going out the door on each purchase.  You can now look for ways to save on things you already buy and spend even more wisely.  For instance, Laura and I like to drink red wine with dinner.  We’re able to get a discount by buying multiple cases at a time instead of a bottle here or there.  We shop at Costco religiously and save money on non-perishable items that we will consume anyway.

We’re going to drink it anyway and it won’t go bad, so it’s just smarter to buy it all at once even though we lay out a good bit of money each time we buy wine.  This further allows us to cut down on the number of trips to stores and shortens our mental ‘to do list’, which makes life even easier.

We do this with as many items we buy as possible.  You always want to make your life more efficient and easier and having money allows you to do that.

When you have money and the bank and no credit card debt, you can take advantage of the thousands of dollars in free travel rewards points credit card companies give away to people smart enough to take advantage of them.

If you’re in credit card debt and are barely managing the minimum payments, this isn’t available to you because you look at credits cards as something ‘bad’ and you likely have a low credit score.  We look at credit cards as a bonanza of free stuff the credit card companies give us and we use the cards for every single possible dollar of spending we can.

We don’t believe in paying cash for anything when the credit card companies are giving a discount and a whole bunch of free stuff to just use their card and then pay it all off at the end of the month.  So it costs us nothing and they give us an interest-free loan on every purchase in addition to a discount.  Tough to beat that!

How to Start Saving

Most people spend all their monthly money haphazardly and then whatever scraps are left over might be put into a savings account at that point.  We suggest turning this equation around completely: Put money into savings first and THEN determine how much you have left over for your housing, car and general lifestyle.

In order to have any kind of reasonable financial life, we think you need to save at least:

• 10% of your income for retirement
• 10%-20% of your income for long-term savings and investments

Once you’re on this savings path, there is literally no stopping you in your quest to be wealthy on a middle-class income.

Retirement

The easiest place to start is with your 401k at work since this is already set up for you.  Make certain you ask your HR department how much the company “matches”.  This is the free money they give you for being smart enough to save for your retirement.

If the company matches “5% dollar-for-dollar on the first 5% you contribute”, what this means in real life is they are giving you – completely free – 5% of your salary to put in your 401k.  All you have to do is contribute 5% on your own.  So if you make $50,000 a year, you’re putting in $2,500 ($50k x 5%) and your company is giving you a free $2,500.  So that’s $5,000, or a full 10% of your income, you’re saving for retirement.

Since traditional 401k’s are pre-tax dollars, you won’t even feel the full effect of the $2,500 being pulled out of your paychecks since that money normally would be subject to payroll taxes and income tax withholding.  So you would have likely only seen around 60% of it anyway.  So in order to save $5,000 in your 401k, you only have to give up around $1,500 out of your paychecks throughout the whole year.

If you started that 401k contribution right out of college at age 22 and pulled it out 40 years later, assuming a 7% annual growth rate, just that $5,000 alone (remember, just $1,500 out of your pocket) will grow to roughly $75,000 at age 62.  That’s a pretty good return on your $1,500!

Long-Term Savings and Investments

Most financial gurus talk about your “emergency fund” as if it were some mythical amount you need only for emergencies.  If you don’t have any money saved after years of working, that’s the emergency itself!

We think people need to stop thinking about savings as something you do for an emergency or some special occasion or purchase and understand that it’s an essential part of your life.  You need to have money because you never know where life will take you.  You have so many more options and so much flexibility with money in the bank.  Without it, you’re stuck needing every day of work your current company can give you, you’re stuck paying off credit card debt you can’t seem to shake free of and you’re just stuck in life.

There are people who work for 5, 10, 20 years and have no money in the bank.  They think nothing of going out for $60 dinners or a $300 clothing purchase but yet the sum total of their entire life savings is zero, or in most cases negative when credit card debt is factored in.  That’s just crazy!

Most people think of savers as “frugal” or “denying themselves” or whatever other pejorative you can come up with.  However, we know this is just a smarter way to live.  You find out what’s important to you and what actually has value and you spend money on it.  If it doesn’t have value to you, you don’t buy it.  It’s that simple.  There is nothing we would want to spend money on right now that we don’t already have, and we’re very sincere about that.

We know that the 80%+ of the population who just spends themselves into oblivion have it wrong because they constantly face the stress of a horrible financial situation and the worry about how to make it work the next day or week or month.

Our savings advice is to really look at all your spending and just start cutting back somewhere small.  Maybe you have all the movie channels and pay $50 a month for them.  Instead, drop those channels and get Netflix streaming for $9 a month.  That’s almost $500 saved a year right there and you can watch essentially every TV show you want on Netflix.

Maybe you like to go out to eat a lot and you don’t want to “deny yourself” that ‘pleasure’.   Why not just get a glass of water with your meal instead of a beer or two?  The $5 beer at a restaurant can be consumed at home for less than $1 a bottle, so save some money that way.

Those are just two small examples among many, but for most people they would add up to $1,000 a year.  When you have zero dollars in the bank, $1,000 is quite a bit of money for two simple changes that would impact your life negatively not one single bit!

Where to Put Your Savings

• If you have credit card debt, you need to start paying that down immediately.  Stop using the card and start paying down your debt.  The 15%-20% interest rates charged on that debt can be absolutely crushing, so that needs to go first.
• Once you’ve paid that down and stabilized your situation, you need to keep a few thousand dollar cushion in your checking account.  Again, you want to make your life less stressful, so having money in the account lets you pay bills as they come in.  You check one more thing off your ‘to do’ list and you move on with no lingering stress.
• Once you have that cushion, you should open up an online savings account to link to your regular checking account.  We recommend Ally Bank or Capital One.  Over time you’ll build up a nest egg that you feel comfortable with.
• Once your cash savings are to the point where you’re quite comfortable, then you need to start investing some of your new monthly savings.
• We recommend opening a Charles Schwab account and investing in their low-cost index mutual funds.  The beauty of these Schwab funds is that you don’t need to purchase a minimum amount to start off with.  We were always turned off by the $2,500-$10,000 fund opening minimums we’ve seen at Vanguard or Fidelity and were impressed with Schwab not having these minimums.  Each month, or even twice a month, put in a regular contribution to your funds.  By putting the money in this way you’ll never have to look for a good time to put your money into the stock market.  You’ll put money in during the good times and you’ll put money in during the bad times and you won’t have to worry about putting in a big lump sum and seeing it drop dramatically because you got in at “the wrong time”.

• Another option is that Fidelity now has dozens of the popular iShares ETF funds available for purchase with no commissions.  These are exchange traded mutual funds and the upshot for the consumer is that you can buy individual shares for less than $100.  So the same strategy holds true that you can make regular contributions where you don’t have to time the market and there are no huge minimums.  You can really diversify your holdings this way and get exposure to a lot of different sub-markets.
• Either concurrently with your stock market investing or once you’ve built up a portfolio you feel comfortable with, we recommend you moving on to Peer-to-Peer lending.  Lending Club and Prosper are the two biggest players in this industry and we have accounts at both sites.  This is a great way to diversify your investments and the returns are potentially spectacular with minimal risk.