Whether you’re saving up for a family reunion or vacation, a car, an emergency fund or a comfortable retirement, there are right – and wrong – ways to put your money away. And while saving towards a goal usually looks pretty simple on paper, there are dozens of pitfalls that millions of people fall into each year. Here’s how to avoid the most common mistakes, and make your hard-earned money really work for you.
Wrong – rely on your own willpower to save each month
When we first sit down and work out a savings strategy, we’re usually brimming with enthusiasm and determination. In theory, it looks so simple just to put X amount away for Y number of months – and voila, savings goal achieved. All you need to do is transfer X into another account each month, right? If you’ve tried this approach before, you’ll know what happens next.
Right – automate your savings
Life happens. We encounter unexpected expenses and may realize it’s going to be a tough month ahead – so we’ll abandon our savings strategy for just one month. This can’t happen if your savings come off your account automatically each month, and you’ll be surprised how quickly you get used to getting by without those funds. This strategy allows you to get out of your own way and see real results without even trying.
Wrong – put all your eggs in one basket
Virtually every bank now allows its customers to open separate accounts linked to their main account to save towards a specific goal with just a few clicks. It’s quick, easy, convenient, and you know exactly where your money is. So why not?
Right – save for separate goals separately
Sadly, if it’s that easy to get money in, it’s usually just as simple to get it out – and that’s where we come back to the problem of willpower. Not only does investing money outside of your bank where it’s harder to access remove much of the temptation to dip into your savings when you ‘need’ to, it also gives you the opportunity to take advantage of an inflation-beating interest rate – rule one of saving.
Wrong – invest in the first savings product you like
When a bank or financial institution comes up with a new savings product, they put a lot of money into marketing it too. They hype up all the benefits of their shiny new product, shower us with glowing testimonials and ‘expert’ opinions, and make it seem like this is the best thing since sliced bread. Sometimes the hype is justified – but more often than not it’s just hype.
Right – explore your options and get expert advice
Just because a product is new doesn’t mean it’s better than a product that’s been on the market (and has the performance data to back it up) for years. Do your homework, ask questions, do the math and compare as many different products as you can. If it’s all too confusing and you’re worried about missing out on a much more favorable interest rate, get an expert opinion from a financial advisor or wealth management broker like CoinIt – especially if it concerns long-term savings for retirement where the right investment vehicle can make a really massive difference over time.
Wrong – calculate what you can save after expenses
If you think you can only ‘afford’ to save what you tend to have left over at the end of the month, you’ll probably end up saving nothing.
Right – pay yourself first
Work out your expenses and a realistic budget, and base what you can afford to save on that. If you have a specific time frame in mind, save the amount you need, not that amount you ‘can’. Saving does mean you’ll have to make a few sacrifices, but mostly it just means spending smarter and more thoughtfully.
Wrong – give up on having fun altogether
If you’re one of the many people who’ve put off saving and then stumbled across an online retirement calculator that delivers some really, really bad news, you might feel like you have to abandon every luxury immediately if you’re ever going to be able to retire. And while saving as much as you possibly can sounds great, saving unsustainably can actually backfire.
Right – find cheaper ways to enjoy yourself just as much
When people set unrealistic savings goals with absolutely nothing left over for fun, they soon start to feel deprived – and in some cases that can actually drive them to abandon their savings plan altogether. A better strategy is to leave a little for enjoyment, and work towards growing your income and getting used to having more fun with less money. Having friends round for a potluck dinner and movie night rather than going out to a restaurant and the cinema is just one example.