Friday, 19 July 2013

Saving Tip: Out of sight - Out of Mind

As we all know, budgeting and saving are inherently linked.  But as anyone who has tried to stick to a budget knows...things always come out of the blue and although you promised yourself that you should save a certain amount this month it is always less than you imagined.

I have one major tip which should help you improve your savings pattern.  It is a variation on the 'Pay Yourself First' idea that so many self help financial books seem to promote but which I never really got my head around so here it is:
Pay your bills first, put a set amount aside for your monthly spend and the REST gets transferred, ON PAY DAY to a savings account which you don't have easy access to
The key to this is making sure that the cash you are saving is OUT OF SIGHT because if it is, the chances are you wont think about it when you are thinking of spending money.

So...How does it work?

It's quite simple.  You do this
exercise whenever you get paid.   But as soon as the cash has hit your bank account do the following things:

  1. Pay off your debt that is falling due that pay period 
    • My credit card bill falls due the day after pay day so this works well for me
    • I pay rent 2 days after pay day so I keep this in my account for the auto-debit which will come
  2. Set aside an amount for spending over the pay period
    • I set aside $1,000 for the month - the rest I spend on my credit card
    • I also set aside $500 as a float from month to month.  This is for 'unexpected costs' and if I eat into this it needs to be replaced next month.  If I don't eat into it then I don't need to contribute this amount next month
  3. The REST gets transferred into an account which is hard to get access to
    • This can be via an auto investment plan in shares or managed funds (I automatically invest in my employee share plan)
    • It can be a high interest saver account - but make sure you DON'T have easy access to this account
    • Pay off your home loan or other debt account - again NO EASY access to this account
The basic principal of my out of sight, out of mind savings principle is that you are less likely to spend money if you can't access it straight away.  If it is in an offset account or some other savings account you can normally transfer it back into your regular transaction account if truly unexpected events do happen.

I think that easy access to our savings causes many of us to have bad habits when it comes to spending this amount.  Try the above method - I use it every month and I rarely (if ever) touch an amount which I have saved.

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