08 July 2015 ~ 0 Comments

How to Save Money when You’re Poor

Warren Buffet said “Do not save what is left after spending, but spend what is left after saving.”

Well, that’s easy to say when you’re the third wealthiest person in the World, but what about the rest of us?

Recent reports show 76% of Americans are living paycheck to paycheck, so how do you get out of that trap? How do you plan for an emergency or retirement when you can hardly even pay your bills?

The good news is that you have more than you realize.

Sure, I’m making an assumption.. maybe you are that one person who is going without meals, but chances are you aren’t.

Warren Buffet was right, save first; spend second.

You can put $5 a month into a savings account.. sure, savings accounts aren’t the best place for your money – but we’ll get to that later.

Set it up automatically to put that $5 in a place you can’t easily get it, put it in another bank so you can’t transfer it online, and don’t make it easy to just go to and spend.  Most employers will even allow you to direct deposit your check into multiple accounts, you can put $5 of each paycheck into this other account.

I challenge you to try it, and I personally guarantee that you will not even notice this $5 is missing, yet now.. you’re saving! You’ll soon find that if you can save $5, you can save $10, and if you can save $10, you can probably save $20… sure, maybe you can’t go to Starbucks every day, but how are you going to go there at all when your car breaks down and you have no money for repairs?

How do you find more money?

The easiest way to make more money, is to spend less.  I look around me and nobody cooks, nobody budgets, people are built into this society of just spending money, can’t afford it? Who cares! Put it on credit, get a loan..

My #1 Tip for Saving Money

My biggest money saving tip was to learn to cook.  I spent years, like most people, buying mostly packaged foods, cooking as a special occasion, and even then using ingredients that came in packages.

I started to write down how much I was spending each day.. nothing to detailed, just the totals off the receipts.  It literally shocked me how much money I was spending a day, without really getting anything.

Just by writing down my totals, I wanted to make it less.  It took literally nothing more than just writing the totals for me to become aware of my waste.  I was able to drop my spending significantly just by thinking about it.  And the biggest category was food.

So how do I make my food costs lower? It became clear when I started looking up what I was buying, and the ingredients required to make it myself.  By buying the ingredients, even the high quality fresh organic produce, I was able to cook my favorite foods, much healthier and less expensive than buying packaged.

I cut my spending in half by literally just learning how to cook.

Become Self Sufficient

Another way to save money, is to learn new skills.  Instead of hiring a landscaper, learn to tend your own lawn.  In the Northwest where I live, tomatoes thrive.. you can literally throw a plant in the ground and have a massive yield.  Can the tomatoes, and now you never have to buy them again.  Wash your own car instead of going through a car wash, do your own repairs instead of hiring someone.

The internet contains every bit of information you could ever want, you no longer need to pay someone $100’s of dollars an hour for technical skills, now a quick 15 minute video on YouTube can put this in your own hands.

Create More Income

There are two kinds of income — passive and active.  Passive income is when you set up a system that creates income for you, without having to spend an hour of work to get an hour of pay.  Active income is when you physically do a job for a wage, an hour of work for an hour of pay.  Setting up Passive Income streams on top of your Active Stream (job) you can increase your income.  There are a lot of techniques you can use on the internet to create passive income. 

Investing is a great way to create passive income, but you need the money first.  We’ll go in to how you can use this extra money next.

So what do you do with this new-found extra money?

The initial way of thinking was to pay off debts, establish a safety net of 3 months, then invest the rest.

This is mostly correct, but I like to split up the safety net.  Traditional thought of 3 months isn’t nearly enough anymore, as professionals spend 6-8 months finding a new job, I like to plan for at least a year.

But we’ll just start with 1 month.

Use your savings to save up 1 full month of your living expenses. The advantage to this is when you have period of REAL struggle.. when I say Struggle I mean your fuel pump went out, or your water heater breaks, or you lost your job.. not a momentary struggle like it’s my cousin’s birthday and I don’t have a gift.  That’s not a real struggle and not worth sacrificing your savings for.

The one month is just a buffer to keep you from getting in debt, because next we’re going to pay off debts.

Pay Off Debts

Paying off debt is the easiest way to save money.  A credit card with $1,000 and 15% interest (a good rate for credit cards these days) that’s $150 a year you are paying in interest, that’s a $12.50 payment a month.. on literally nothing. That’s more than your Netflix subscription.  Getting rid of debt will free up not only your monthly payment, but the extra interest charges that grow regardless of what you spend.

Paying off debt is the absolute #1 critical step to saving money.. paying hundreds of dollars a year just to maintain debt will guarantee you are forever broke.

There are a few theories about paying off debt, a lot of people say to pay the highest interest rate first — which of course makes sense, because it is costing you the most.  Other people like to pay the lowest balance off first, so you can see progress.  I’m a really driven person, so I paid off my highest debt first.

Paying your highest debt first is a bit challenging because it can feel like you’re making no progress, but it’s a great feeling when you’ve completed the most challenging hurdle to know that it’s all downhill from there, that the hardest part was over.

When paying off your debts, don’t decrease your debt-budget.  What I mean is, if you’re paying $200 a month to credit cards, keep paying that (or more) until they are all paid off. Even if you pay off half of them, and your Credit Card bills are now only $100 a month, keep spending the $200 – your’e used to it, you’ve adapted to it, and that extra principle payment will take years off of the end time.

Save More

My next suggestion is to save more.  After your debts are paid you can use that same budget to put towards the rest of your safety net.  In our example, we were saving $5 a paycheck.. since our debt is now paid off which was $200 a month, that’s about $205 a month you have extra – take that some money and put it into your savings until you have reached a full year of your current wage.

This safety net will give you a ton of flexibility, it will allow you to endure emergencies without having to go back into high-interest debt, it’s your money that you have.  You will lose your job, it’s inevitable.  Having a safety net will allow you to endure the bumps in the road, where many others will end up in mountains of debt, or worse.

You will want to keep your safety net secure, but a savings account won’t do it.  Traditionally it was recommended to use Money Market accounts, however current yields have left them an unattractive solution.

There are now online banks that return much higher yields, for example a Discover Bank savings account will give you nearly 1% interest, versus a traditional bank which gives 0.01%

Invest The Rest

After you have a good safety net and are out of debt, you’ll start to feel pretty rich, even on a low income, but don’t celebrate yet.  You want to invest in your future, so continue to put money aside for your future.  The great thing about this is the more you invest over time, the sooner you can stop working.  Most individuals can survive off of $300,000 in an investment account.. the average return of 7% on 300k would yield $21,000 a year in returns.

$300,000 seems like a lot of money, but it can happen pretty quick thanks to compounding.. When you have $10,000 and you’re getting 7% return that means next year you have $10,700 that is getting that return.. in fact it is common to see investments double every 7-10 years, so depending on how young you are, the easier it is.  For example, if you are just entering the workplace at 20 years old, and plan to retire by 60.. that’s 40 years, that means your money will have doubled 3 times.  If you started with $50,000 it would double to $100,000 to $200,000 to $400,000 by the time you are 60.  $50,000 isn’t so bad… but why stop?  The more you put in, the faster you can reach your goal, and the earlier you can quit your job and live a life of real freedom.

Where do you put it?

Where you invest is obviously open to interpretation, but I have a few favorite methods

Treasuries

Bonds and Securities are not very attractive right now, the rate is at 0%, but inflation protected bonds are still a very secure place to keep some money.  A Series I bond has a variable interest rate based on inflation, so you are guaranteed your money will, worst case scenario, hold up to inflation.  This is a great place to diversify to create stability.

Stock Market

The stock market is higher risk, but higher return – this is where you find that 7% average return.. of course, it could crash and lose everything – however over the long term, there has always been growth since the inception of the US Stock Market in the 30’s, so it generally is safe over a long term.  It’s important to understand the fees though, some investment accounts will steal your profits.  There are some great automated investing tools though which make use of technology to reduce overhead and provide lower fees and generally better returns, but please do your own research before investing.

Dividend stocks are the best because when a company that offers dividends records a profit, the profit is divided among all shares, this the best way to compound your growth.

Peer to Peer Lending

There’s a great newer way of investing called Peer to Peer lending.  How this works is someone will go onto a website and request a loan, rather than going to a bank.  Then investors can view the loan, and purchase a ‘note’ which is a percentage of the loan, generally the minimum is $25 notes.  Using this the borrower gets a better rate because they are cutting out the banker, and the investor has an opportunity to tap in on the lending market that banks have monopolized. So now you get the interest rate from the loan.  Of course there is risk of the person defaulting on their loan and not paying it, but the risk is washed due to the vast diversification of having only $25 notes, for example you can end up with 800 or more different notes all in different loans, so if one person defaults, the interest of the others more than makes up for it.  Propser claims that no investor has lost money.who have held more than 200 notes.

 

I know this was a long one, but I think it covers the basics and how you can start saving today, even if you don’t think you have any money.  I talked about learning to cook as a great way to find extra room in your budget, what are your best money saving tips to help people get started?

 

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