Financial Fridays: Stefu Suggests Savings Technique.

Last time I talked a little about ideas for saving for a future house down payment or home improvement. Today I want to address an issue that you may find while trying to implement that system.

The idea behind the system I encouraged is that you should be able to afford to put that extra money to the side, assuming you are paying less in rent than your income allows. However, many of us may find that we don’t have that much left over at the end of the month. There are a number of reasons this could be. I’ll address one likely reason today.

The biggest reason we can’t find extra money in the budget (even when it should be there) is because we have already established a certain spending pattern that only allows enough money to cover the bills. I suggest that you pretend like you MUST pay 28% of your income for your rent or mortgage. I know a lot of you haven’t pretended since you played house with your My Buddy doll. But by doing this, you force yourself to save money that would otherwise be used for something less important to you.

Now, how do you put this money to the side without noticing it? The easiest way I find is this:

First calculate the amount that you should be able to afford in rent (28% of your income). In our last example we assumed this amount to be $1,400. Next, subtract the actual amount of rent you are paying from this amount. In our example it would be: $1,400 - $900 = $500. This is the amount you should be able to put to the side every month. Next, take your savings amount and divide it by the number of paychecks or pay periods you expect during the month. For many people this would be 2. Some people only get paid once a month, and others weekly. If you are married and both working you may get anywhere from 4 – 8 paychecks in one month. For our purposes we will assume 4 paychecks coming in. So, take $500 divided by 4 paychecks = $125. If you take out $125 out of each paycheck, you can save up that $500 without noticing as much of a ding.

It is vitally important that you PAY YOURSELF before you pay your bills. If you don’t do this, you may have a hard time saving anything. In the event you pay yourself first and then don’t have enough for one of your upcoming bills, you can simply take out what you need from your savings. I don’t recommend doing this very often as it will defeat the purpose. We’ll talk more about this later.

I hope you are all on your way to your savings goals!