With so many economic threads going up recently, I thought I'd share share one of the financial strategies we use. This may or may not work for you, but I thought I'd share in case it may help someone out there who is struggling and searching for ideas. It has been excellent for us -- as it afford us nice things in life, while not dipping into our savings. Again, no single plan works for everyone, this is just an idea that has happened to work for us.
I'm sure we all know how to budget, but for the sake of simplicity, let's say you have your finances divided into just two categories: checking and savings. The checking account is obvious -- mortgage/rent, utilities, food, etc. This will always be pretty close to break-even as you intelligently budgeted your money and alot just enough money here. The savings account, however, is a little fuzzier. You put money into savings every month, but without directly specifying what you are saving for. It might be for some 'necessity' items -- such as a new roof, car repairs, or new clothes for the baby. Or it might be for 'luxury' items -- such as a new computer, new flat panel, or new gaming console.
Some people are able to save very well using the above system. But we found that we were often spending at least the same amount on luxury than we were actually saving. In other words we were spending half of our savings on luxury items -- this made for a rather slow-growing savings account. So, what if, instead, you had NO luxury monies to spend from your actual savings? You would have only checking + savings (necessity). But of course you cannot live life without any luxuries. You have to enjoy yourself to some extent.
So what we do is take lump sums of money that we save each year and invest it. The profit from investments is what we can spend on luxury items. If we earn nothing, we get no luxury (I know this sounds harsh, and you can tweak this part if you want). If we profit $10K in a year, then we get to spend $10K that year on luxury (though we don't have to).
The money that was initially invested is still considered part of savings (necessity). Therefore, if an emergency does arise, you still have those funds to tap into. And you can continually increase the amount you invest as you add more to the savings portion of your finances. Only the profit you earned is considered savings (luxury).
How much of your profit/luxury money you want to spend is entirely up to you. You might say you get to spend 1/3, 2/3, or even all of it. Or maybe it depends on how much profit you earned. Or maybe you want to save your smaller profits until you can afford a big ticket item.
But at least you are only spending profit, and not touching the actual money you saved. Things will be slow, at first, especially if you have a small amount to invest. And of course this plan requires that you learn about investments before you start throwing your money into things you don't understand. But I think if you take the time to research your investments, and have the discipline to follow this plan, you will find yourself in a much more solvent situation in the long run.
This is just an idea - let's hear your thoughts or even your own personal strategies.
Cliffs:
- Invest savings
- Keep initial investments as savings nest-egg (necessity)
- Use profit-only for luxury items
Edit: Please realize I am NOT talking about your RETIREMENT accounts - this is about your every-day savings accounts. Retirement accounts are another topic entirely.
I'm sure we all know how to budget, but for the sake of simplicity, let's say you have your finances divided into just two categories: checking and savings. The checking account is obvious -- mortgage/rent, utilities, food, etc. This will always be pretty close to break-even as you intelligently budgeted your money and alot just enough money here. The savings account, however, is a little fuzzier. You put money into savings every month, but without directly specifying what you are saving for. It might be for some 'necessity' items -- such as a new roof, car repairs, or new clothes for the baby. Or it might be for 'luxury' items -- such as a new computer, new flat panel, or new gaming console.
Some people are able to save very well using the above system. But we found that we were often spending at least the same amount on luxury than we were actually saving. In other words we were spending half of our savings on luxury items -- this made for a rather slow-growing savings account. So, what if, instead, you had NO luxury monies to spend from your actual savings? You would have only checking + savings (necessity). But of course you cannot live life without any luxuries. You have to enjoy yourself to some extent.
So what we do is take lump sums of money that we save each year and invest it. The profit from investments is what we can spend on luxury items. If we earn nothing, we get no luxury (I know this sounds harsh, and you can tweak this part if you want). If we profit $10K in a year, then we get to spend $10K that year on luxury (though we don't have to).
The money that was initially invested is still considered part of savings (necessity). Therefore, if an emergency does arise, you still have those funds to tap into. And you can continually increase the amount you invest as you add more to the savings portion of your finances. Only the profit you earned is considered savings (luxury).
How much of your profit/luxury money you want to spend is entirely up to you. You might say you get to spend 1/3, 2/3, or even all of it. Or maybe it depends on how much profit you earned. Or maybe you want to save your smaller profits until you can afford a big ticket item.
But at least you are only spending profit, and not touching the actual money you saved. Things will be slow, at first, especially if you have a small amount to invest. And of course this plan requires that you learn about investments before you start throwing your money into things you don't understand. But I think if you take the time to research your investments, and have the discipline to follow this plan, you will find yourself in a much more solvent situation in the long run.
This is just an idea - let's hear your thoughts or even your own personal strategies.
Cliffs:
- Invest savings
- Keep initial investments as savings nest-egg (necessity)
- Use profit-only for luxury items
Edit: Please realize I am NOT talking about your RETIREMENT accounts - this is about your every-day savings accounts. Retirement accounts are another topic entirely.
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