It’s a great feeling to be out of debt and have some savings. But let’s face it: some people have less money coming in than going out, and it’s not that they’re making silly choices to live beyond their means. Many people are struggling in this economy because their wages have been cut or their jobs have been taken away and they can’t find another job at all. Millions of Americans are living on considerably less money than they had a few years ago, through no fault of their own.
Saving when you’re in debt
If this is you, I don’t claim to have all the answers, but I have been where you are now. Sometimes there are periods in life where we can’t save a penny because we’re going into debt just buying necessities. The good news is that you can turn this around eventually, and in the meantime, there are a few things you can do.
The following tips are for people at various levels of income, so if some of them are beyond your means, just ignore those and continue reading for the others that will work for you.
- Put what money you can save into a savings account, even if it’s just a few dollars here and there. The problem: some banks have a high minimum amount you have to put in to open a savings account. But plenty of banks are more reasonable – ING offers savings accounts with no minimum and no fees.
- Set up a piggy bank. Stash some spare change (or whatever you can afford to do without) each day into a jar. Every so often, take this money out and put it in your bank account.
- Keep adding to that fund, and never remove a penny unless someone’s life is at stake and there’s absolutely no other money available to you. I mean it! Don’t touch it unless it’s life or death.
- Look for better interest rates. Right now, interest rates on savings – even CDs – are disgustingly low. But keep watching – they’ll have to go up at some point, and when they do, move your savings account to a bank with a better rate. I check rates every six months or so to see if I can do better somewhere else.
- Consider opening a CD. Eventually – even if it takes years – you’ll have enough money to put into CDs or an IRA retirement account. Even if all you have is the minimum to open such an account, your savings interest rate should be better. Remember that you can’t touch the money in a CD without paying penalties, so if you’re concerned you’ll need that money before the CD matures, then it may be smarter to leave it in regular savings.
- Start a retirement fund. Eventually, you’ll have enough money to open a retirement account, if that’s your goal. Keep in mind that you can’t withdraw from retirement funds (without paying penalties) until you’re about 59 years old.
Does it have to be a retirement fund?
Consider also that retirement funds aren’t the only way to save for retirement. Typically, funds based on stocks and bonds yield better profits over time than savings accounts… but the stock market can also pull one of its fun and exciting downturns right when you’re ready to retire. I saw this happen to a number of friends and acquaintances in 2008 and 2009.
There are a number of ways to set yourself up for a reasonably comfortable retirement, so you may want to consider other possible goals than retirement funds:
- Get your house paid off. Not having a mortgage payment every month sure makes your income go further – even a social security income. Remember that houses are never cost-free – they need repairs and upkeep. But the mortgage is a nice thing to be out from under, and it could make the difference between being able to retire or not.
- Just put it in a savings account. Even if a savings account isn’t necessarily the best way to invest toward retirement, it is a good way. And if you’re always living paycheck and paycheck, and sometimes needing to dip into that savings, at least there’s no cost (penalties) to get that money out.
- Invest in a second home to rent. Now, if you’re currently pinching pennies, this may sound ludicrous to you. But if you’re a resourceful person, chances are you won’t spend your entire adult life pinching pennies. At some point, you may find you can afford a second home, especially if it’s in an area where you can generally find renters who will pay your mortgage, or close to it. So you get the renters paying off the second home, and the tax benefits of owning the second home. Just be careful who you take as tenants, since not everyone will respect your property.
- Invest in an established business (or rental property). This is tricky, so I’m just going to say contact a good financial adviser for help on this one. There are a lot of tricksters out there who will try to unload a failing business on you. But there are a lot of good, healthy businesses whose owners just want to retire with a nice chunk of cash. You may be able to purchase one for about the same amount as a house, and then live off the profits of that business.
Finding that extra cash
You may be wondering how on earth you’re supposed to come up with any spare change to put toward these tips.
- Use cash, and take out your spare change each day and put it into a piggy bank. Even if you keep the quarters for the laundromat, the nickels, dimes and pennies will add up eventually!
- Put a dollar a day into your piggy bank. If you can afford it, $1/day is $365/year. Not bad. What if that’s more than you can afford? Even a quarter a day is $91.25 a year. Whatever you can manage is better than nothing.
- Birthday and holiday checks. If you get a check from family occasionally, put that straight into savings. If you feel sad at the thought of not spending that check on something nice, learn to gaze at your slowly improving bank statements and take pride and enjoyment from knowing you have that money saved.
- IRS refunds. For goodness’ sake, whenever you get a refund from your taxes, put that straight into the bank. That money is now yours, safely tucked away, where no one can take it from you (even if your bank collapses, the FDIC would make sure you get every penny of your saved money, up to $250,000). Even for some very poor people, IRS refunds can be significant. You may have to spend some of your refund on bills, and that’s okay, too. Just put it in the bank first, and pay out of it as needed. With any luck, you’ll still have some left in savings.
- Automatic savings. If you’re underemployed, but still getting regular checks from a job or unemployment, some banks will do an automatic monthly draft from your checking account to your savings account. Even just a $5 automatic draft a month would be something (and it’s earning interest, however pitiful that is right now), so if you can manage any amount, however small, this is worth doing. And you never have to remember to do it manually. INGDirect has one of these programs.
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Updated: February 20, 2012
Copyright: February 20, 2012
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