In our recent discussion about tithing, I made a confession:
I do not tithe to church or charity. I feel guilty about this. My rationale is always: “Once I take care of myself, I’ll take care of other people.” Yet what do I mean by “taking care of myself”? I don’t know. Sometimes I think “once I’ve saved X, then I’ll start sharing my wealth”, but X seems to be a moving target.
I’ve thought a lot about this over the past couple weeks. I’ve looked at my own life: I have a $10,000 emergency fund, a growing business, and no consumer debt. I own an 1800-square-foot home on half an acre, a car, and a pantry stocked with food. Despite all this, I still sometimes feel poor. I’m not. I know this. According to the Global Rich List, my wealth places me in the top 1% of the world population, and that will likely increase as I get older.
I have enough. I’m ready to share. But how?
Learning to give I’ve written many times how important it is to start saving for the future, no matter how much you set aside. If you can only afford to save $5 a month, then start with $5. If you can afford $50 a month, start with $50. The key is to develop the habit. In time, most people find they can bump their saving rate higher — $10, $20, $200.
In our recent conversation about tithing, Kathleen M. urged me to consider using this same technique to develop the habit of giving:
If you do want to start giving regularly, start with something small, like $5 or $10 per month. A lot of people make a practice of giving the same amount that they put into savings.
Starting small with giving works the same as starting small with saving: The amounts may not really affect your budget, but they teach you the habit, the mechanics of contributing. Once you see that you can save, or that you can give to charity, you can begin to increase the amounts.
I started my own saving by setting aside just a few dollars a month. Now, four years later, I contribute about $1,000 a month to high-yield savings accounts. If I can save that much for myself, I can certainly afford to set aside a few dollars (or more) to help others.
So, I’ve made the decision that I can afford to give, and that giving is good. But where should I direct my money? There are hundreds of programs I could support. For example, I believe strongly in the missions of these groups:
I contribute to these organizations already, though. If I’m going to begin a campaign of personal giving, I want my money to do something more.
Micro-lending Last fall, I wrote a review of Banker to the Poor: Micro-Lending and the Battle Against World Poverty, which describes the work of Muhammad Yunus, winner of the 2006 Nobel Peace Prize. Yunus established the Grameen Bank, which offers small low-interest, collateral-free loans to the poor. These micro-loans — most of which are given to women — are used for entrepreneurship, and are surprisingly effective at helping recipients escape the bonds of poverty.
I like micro-lending. I like that it combats poverty through personal entrepreneurship, a notion I value highly. It’s like teaching them to fish instead of giving them fish. But how can I, one man in Oregon, provide a small loan to somebody halfway across the world? Fortunately, there’s an easy way to do this.
San Francisco-based Kiva is “the world’s first person-to-person micro-lending website, empowering individuals to lend directly to unique entrepreneurs in the developing world.”
Kiva allows average people to act as micro-lenders. You can browse profiles of entrepreneurs from around the world, choose somebody to lend to, and then Kiva works with the actual micro-finance organization to distribute the loan. When lenders get their money back, they can re-lend it to somebody else in need.
My goal for today is to set up a Kiva account, and to fund one micro-loan. Though this is a small gesture — a very small gesture — it’s a start. It’s a first step on the road to charitable giving. In time, I hope to apply the same discipline toward this as I did toward saving. The battle against world poverty is made up of many such small gestures.
Fighting poverty Kiva is not the only organization working to fight poverty, of course. Other organizations I may consider donating to in the future include:
Though Grameen Foundation is not a part of Yunus’ Grameen Bank, the two work closely to fight world poverty through micro-finance. If I wanted to just donate money (instead of getting personally involved, as through Kiva), I might choose to do so here.
Heifer International is a “non-profit, humanitarian assistance, and sustainable development organization that specializes in providing livestock and related services to limited-resource families worldwide. Heifer does this regardless of race, creed, religion or national origin.”
Oxfam International is an “international group of independent non-governmental organizations dedicated to fighting poverty and related injustice around the world.” Oxfam’s lousy web site is vague about how this is accomplished, although several GRS readers have recommended this group in the past.
For more on the subject of giving and micro-finance, check out the following stories from the Get Rich Slowly archives:
I’m not naive — I don’t believe that poverty will ever be eliminated from the world completely — but I hope that through my actions I can help a few other people achieve their dreams, as I’ve been able to achieve mine.
Poverty does not belong in a civilized human society. Its proper place is in a museum. — Muhammad Yunus, Banker to the Poor —
Today is Blog Action Day. The topic this year is poverty. This is the first of three posts about the subject today at Get Rich Slowly.
Learning how to manage your money is a huge part of “adulting,” but it’s not something most of us were taught in school. Luckily, TikTok is here to bring you up to speed. If you’ve been sleeping on TikTok like I have, let me fill you in. There’s an entire subgenre of TikTok dedicated to … [Read more…]
Saving for the future can be a real challenge. It’s human nature to want to enjoy things now, so sacrificing today to put money aside for the years or even decades ahead is difficult for many.
As the saying goes, though, good things certainly come to those who wait. The sacrifices that you make now can have a profound impact on your future finances. In fact, you could easily have an extra half-million dollars for retirement, with only a little dedication and patience today.
How Much Could You Save in 30 Years?
Thanks to compound interest, the dollars you set aside today will continue to grow and grow over the years. The longer you let that money sit and compound, the larger your balance will grow.
Let’s say you decided to save $125 a week now (or $500 a month) in a high-yield savings account. You plan to contribute monthly, and don’t intend to touch that money for the next 30 years.
Over three decades, the actual contributions into your savings account would total an impressive $180,000. This number alone is nothing to scoff at, of course; with the power of compound interest, though, your balance could be expected to balloon by tens of thousands of dollars.
Of course, it’s impossible to know what interest rates will do in the years to come. We could see skyrocketing rates just as we could see APYs (annual percentage yield) plummet. However, let’s just see the math at today’s high-yield savings rates, for simplicity’s sake.
Image source: Investors.gov.
Using the calculator at Investor.gov, we can see that a $500 monthly contribution into a savings account earning 1.7% APY grows to $233,123.75 over time. That’s more than $53,000 in “free” money, thanks to compound interest.
Choose to put your savings in a certificate of deposit (CD) instead, and you may be able to earn even more. For instance, some CDs today offer around 2.2% APY. At that rate, your savings would grow to over $252,141 in 30 years, earning you an extra $72,141.72 on top of your monthly contributions.
With $500 monthly contributions
Earning an average of 1.2% APY
Earning an average of 1.7% APY
Earning an average of 2.2% APY
After 30 years
$180,000
$215,845.76
$233,123.75
$252,141.72
Growth
n/a
+$35,845.76
+$53,123.75
+$72,141.72
Where You Save Your Money Matters
As you can already see, it is important to put your money in an account that earns as much as possible, while also maintaining a risk level that keeps you comfortable. While a savings account or CD is a safe choice that still earns a modest return, you could earn even more by putting that extra $500 into a different savings vehicle.
Historically, 401(k) retirement savings accounts have an average rate of return somewhere in the 5-8% range. While your actual return is always contingent on market trends and the investments/risk tolerances you select, putting extra savings in your portfolio is a better way to earn even more than you would with a savings account.
“Between 1926 and 2018, the average annual return of the S&P 500 was about 10%. Adjust that 10% for inflation, and that brings you to an average annual, real return of 7%,” wrote The Motley Fool’s Catherine Brock.
Individual years may return more or less. Over decades, however, investing broadly in the stock market has actually been very predictable (though it’s always important to remember that past performance does not guarantee what happens in the future).
As an example, if you contribute $500 a month and earn an average return of 6.5% annually, your retirement account could easily grow to over $530,000 in 30 years. Even earning a below-average annual return of 4.5% would result in a balance of over $367,000, more than doubling your cash contributions in 30 years!
If you put your contributions in a…
Savings account earning 1.7% APY
CD earning 2.2% APY
401(K) with an average return of 4.5% annually
401(K) with an average return of 6% annually
Your balance after 30 years will be…
$233,123.75
$252,141.72
$375,404.70
$490,128.23
Of course, investments involve added risk and expenses, and returns aren’t guaranteed. However, you can easily see how much it matters when choosing where to put your savings.
If You Can’t Spare $500 a Month…
I understand setting aside $500 a month might be a stretch for some households. If that’s the case for you right now, don’t fret — you can still build an impressive nest egg by putting aside whatever you can.
For instance, let’s say you’re only able to save $100 a month. After 30 years, you will have contributed $36,000 out of your own pocket into savings, but thanks to compound interest, you may see a balance that’s much higher.
With $100 monthly contributions
Earning an average of 1.2% APY
Earning an average of 1.7% APY
Earning an average of 2.2% APY
After 30 years
$36,000
$43,169.15
$46,624.75
$50,428.34
Growth
n/a
+$7,169.15
+$10,624.75
+$14,428.34
Even earning a mere 1.2% APY with your savings account would earn you an extra $7,169. That’s money you didn’t work to earn, which can go toward your retirement expenses (or even a fun family vacation).
Save Now, Spend Later
The most important rule in saving is to set aside as much as you can as early as possible. Whether you’re able to put $500 a month into savings today or not, strive to put as much as possible into the account of your choosing.
Compound interest will work to grow your money over the years. The longer you save, the higher your savings will grow. And of course, as your career progresses and your financial situation changes, you can always increase those monthly contributions to earn even more.
With a little dedication (and some key discipline), today’s savings could easily be tomorrow’s comfortable nest egg.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
Zero based budgeting is a process where every dollar that comes in goes to the number one priority.
It’s an effective way of prioritizing your money and executing properly, but it can be hard to know where to start when you are just getting started with this new system.
Budgeting can be a nightmare when you don’t have the mindset and tools to make it easier.
So many people struggle with money- they are overspending on things their family doesn’t need or doesn’t enjoy, which causes stress in their lives. But if your goal is financial freedom, it’s time to learn about a new budgeting system.
If you have a desire to:
Spend less than you make
Get out of debt
Save money faster
Become financially independent
Then, you are in the right place! Let how easy and simple zero based budgeting really is!
Decide what you want your budget to achieve: a zero-based budget forces you to think about what you want your money to do, rather than just accepting the status quo.
If you want to use zero based budgeting but aren’t sure where to start, this article will guide you through setting it up in an easy and effective way.
What is zero based budgeting?
Zero based budgeting is a financial planning strategy where every dollar in the budget has a specific purpose. With this type of budget, it can be helpful for those looking to get their finances in order or who want more control over their spending.
A zero based budget is when you start from scratch every month and assign every dollar a job.
Income – Expenses = $0
You begin by calculating your income for the month, then subtracting your known expenses. What’s left is $0, which means you have to get creative with how you’ll spend the rest of your money.
You can use a zero based budget template to help make this process easier.
What are the benefits of using a zero based budget template?
There are many benefits to using a zero based budget template.
Perhaps the most obvious benefit is that it allows you to see where every penny is going. This comprehensive view gives you a clear picture of your expenses and makes it easy to identify areas where you can cut back on spending.
In addition, using a zero based budget helps individuals worry less about their financial health. Since all living expenses are accounted for in the budgeting process, there is no need to panic if an unexpected expense pops up. This peace of mind can be very helpful when trying to stick to long-term financial goals.
A zero based budget template is also easy to follow. The basic plan can be executed without any difficulty, making it a great choice for people who want a simple way to manage their finances.
How to create a zero based budget template?
A zero based budget template can be helpful in tracking your money and achieving financial goals.
There are a variety of ways to create a zero based budgeting template, and no one size fits all approach. That is why we offer a zero based budget template in our shop that you can modify to your needs.
There are a few key things you’ll need to create your zero based budget template. The first is a list of your monthly income, expenses, and savings goals for the year. This will help you stay on track and plan ahead.
The next step is to individually itemize each expense and income. This may be time-consuming but it’s crucial in order to get an accurate picture of where your money is going.
After that, it’s important to track your spending and income on a monthly basis. This will help you see if you’re meeting your goals or not.
It is important to choose the proper zero based budgeting template for your needs.
What are the 5 steps in creating a zero based budget?
There are five steps in creating a zero-based budget. This system was made popular by Dave Ramsey.
We will quickly outline the five steps to make your first zero based budget. Then, we will go into detail on creating your own zero based budget.
List your income
List your expenses
Subtract your income from expenses to reach zero
Track your expenses.
Make a new budget for the next month or pay period.
One way to ensure success by following a zero based budget is by taking small steps instead of making large changes all at once–this can be difficult for some people who are used to living paycheck-to-paycheck.
Another suggestion is to allow yourself some “fun money” so that you don’t feel too restricted while trying to adjust your spending habits.
By following these tips and using a zero based budgeting template, you can successfully get yourself back on track financially!
How to Create a Zero Based Budget
Zero-based budgeting is a system of budgeting that has been gaining in popularity since the introduction of personal computers and spreadsheets. It encourages decision-making based on values and not numbers, which is important in a time when numbers are often used to make decisions.
Zero-based budgeting allows you to start with a clean slate and create your own vision of what the future looks like.
You will need to gather all of your financial information together, including your income, debts, and expenses.
Step # 1: List out your income
The first step in creating a zero based budget is to list out all of your income.
This should include job income, side hustles, rental properties, alimony, child support, and investment income. Once you have a complete picture of your income sources, you can start to make decisions about how to allocate your money.
It is important to decide how you plan to budget your money on a monthly basis, bi-weekly basis, or by paycheck.
Step #2: Tally up your expenses
Be sure to include any regular expenses you have as well, such as rent or mortgage payments, car loans, and credit card bills.
Think of all of the budgeting categories you need for absolutely everything.
This will help you track your spending more closely and make it easier to find areas where you can cut back. Some people recommend creating as many budgeting categories as possible, including for example:
Housing
Utilities
Food
Transportation
Entertainment
Health care
If there’s something that doesn’t fit neatly into a category, come up with a name for it that will help you remember what it is. For example, “clothes” or “misc.”
You’ll also need to factor in any debts you may have.
Step #3: Get your budget to zero
Once you have a full list of your expenses, it’s time to subtract that amount from your income. Then, figure out if you are close to zero.
This is where you will likely have to make adjustments.
There are two ways to get your budget to zero- either spend less than you make (aka cut spending) or make more money.
If you want to stay out of debt and save money, it’s important to do one or both of these things. It may be difficult at first, but with a little bit of effort, you can get your budget under control and start saving for the future.
Budgeting is an extremely important tool to have in your financial arsenal. It allows you to have more control over your money and can help you make more of it. By following a few simple steps, you can get your budget to zero and start saving for the future.
Step # 4: Track your expenses
In order to be successful with a zero based budget, you have to be willing and able to track your expenses. This means being mindful of every penny that goes in and out of your account – ALL month long!
By tracking your expenses, you’re ensuring that every penny goes into the right place. This enables you to see where your money is going and how you can save in specific areas.
Expenses tracking apps allow you to easily record, categorize, and analyze your spending. They let you see how much money you spend on different categories of items from groceries to travel and more. Some of the most popular apps are Simplifi, You Need a Budget, and Qube Money.
This also makes tax season less daunting because you’ll have a complete record of all of your transactions.
You can also use this information to refine a realistic budget that works for you.
Step # 5: Make a new budget for each month or paycheck
Creating a new budget every month is an important part of zero based budgeting. This helps ensure that you are always aware of your current financial situation and can make changes as needed.
It is best to create your budget before the month begins, so you have time to adjust as necessary.
A zero-based budget is a great way to get your finances in order. It can be tough to stick to, but it’s worth it because it forces you to pay attention and make adjustments.
This is why the budget by paycheck method has gained popularity in conjunction with the zero based budgeting system.
Tips to Make Your Zero Based Budget Successful
It can be difficult to stick to a budget, but there are ways to make it happen.
Here are a few quick budgeting tips:
Make a list of your necessary expenses and stick to it.
Cut back on unnecessary spending.
Live within your means.
Find cheaper alternatives to your regular expenses.
In addition, here is what you need to make sure your money is spent where you want and not following the status quo.
You need to learn which payment type is best if you are trying to stick to a budget.
Know your End Goal
What do you want your money to do for you?
Too many times, we let life dictate how and where we want to spend money. Then, we are always chasing from behind.
To truly make your money work for you, decide on three core areas you want to spend your money. Then, make your budget reflect those values.
Understand the Flexibility of Zero Based Budget
Zero-based budgeting is a great way to stay flexible with your finances. There are no set rules to follow, and you can adapt as your life changes. The goal is to always be mindful of your spending and make sure that every penny counts.
Unexpected expenses are going to pop up from time to time, so it’s important to have some flexibility in your budget. That way, you can handle these unexpected costs without breaking the bank.
Put Most Important Expenses at the Top
When creating a zero based budget, it is important to start with the most important items and work your way down.
This ensures that you do not miss any essential expenses and that you are able to stick to your budget. It is also important to be realistic about what you can afford and to make sure that you are flexible in case of unexpected expenses.
Put in a Cushion or a Buffer
When starting a zero based budget, it is important to be realistic about what you can and cannot do.
Some people find it helpful to have a cushion in case of unexpected expenses, while others prefer to keep their spending as low as possible. It is important to find what works best for you and stick to it.
Additionally, remember that your goal should be to live within your means, not spend less than you make.
Look Ahead
When creating or following a zero based budget, it is important to be mindful of any upcoming events that may require more money.
This includes things like holidays, birthdays, and special occasions. If you know these events are coming up, you can plan for them in your budget and make sure you have the funds available.
Check out ideas for bill calendar strategies.
Sinking Funds
One of the most important things to remember is that you need to plan for big-ticket items and one-off events. This can be done using sinking funds.
Sinking funds are special savings accounts that are specifically designated for planned expenses.
You put money into the account over time until you have saved enough to cover the expense. This allows you to avoid breaking your budget when something unexpected comes up.
Learn how to use sinking funds.
zero based budgeting Example
Zero based budgeting is a way of organizing your finances in which you spend money only on things that have an actual impact on your financial situation.
This method can help you stay mindful of how much you are spending and where it is going.
It can also help you to make better decisions about what needs to be paid off, saved for, or invested in.
Here is a basic zero based budget example:
Can You Make a Zero-Based Budget With an Irregular Income?
Zero-based budgeting is an excellent way to manage your finances when you have an irregular income.
Regardless of how much money you earn each month, you can create a budget that will help you save money and make the most of your income. With a zero-based budget, every penny has a purpose and you can be sure that you are making the most of your resources.
It is also helpful to “age” your money by at least one month. That means your April income will be paying your May bills.
The Best Zero Based Budget Templates and Apps
Zero-based budgeting is a methodology of budgeting that starts with the assumption that how much one has at the beginning of each period should be used to purchase only those things needed. This is different from the traditional budgeting practice of starting with how much one has at the end of the last period and using that as a basis for what needs to happen during the next period.
There are a number of zero-based budget templates and apps that are available on the internet. The following seven are some of the most popular:
1. Tiller Money
Tiller Money is a budgeting app that allows you to create a zero-based budget. This means that every dollar in your budget has a specific purpose.
It has a “Foundation Template” feature that allows expenses to be budgeted against goals in order to make sure the amount of money actually spent is at a minimum.
This allows you to create a zero based budget quickly and easily.
You can try Tiller Money for free for 30 days, and the annual cost is $79.
2. Simplifi by Quicken
Simplifi by Quicken is a budgeting app that takes a different approach to budgeting.
Rather than starting with your current income and expenses and trying to adjust them, Simplifi starts with your savings goals and works backwards. This can be helpful for those who have trouble sticking to a budget because it allows you to focus on your financial dreams rather than your current spending habits.
You can set up your own categories, limits, watchlist, and spending plan.
It offers all of the features of Quicken with the added convenience of being able to access it on your phone or tablet.
Another thing that makes Simplifi stand out is that it is ad-free (unlike Mint), which can be helpful if you are trying to stay focused while budgeting.
Enjoy your first 30 days free and then pay as low as $3.99 per month.
3. Qube Money
Qube is an app that helps you create intentional, smart spending habits.
With Qube, you have the freedom to manage your money with real purpose. Qube helps you stay on top of your finances by giving you a clear picture of where your money is going and how much you have leftover each month.
Qube Money is a budgeting tool that helps you manage your money by automatically ledger transactions and allowing you to divvy up your money into qubes. This makes it easy for you to see how much money you have in each category and click to spend.
Get started with Basic for free with 10 qubes. Upgrade to Premium for $6.50 per month.
4. YNAB
You Need a Budget (YNAB) is a popular method of budgeting that requires you to spend money from the previous month’s income. They stress “aging your money” to break the living paycheck to paycheck method.
Each month you start from scratch each month, accounting for all of your income and expenses.
YNAB is best known for its awesome support community and training.
It offers a free trial for 34 days, after which it costs $84 per year.
Best Zero-Based Budget Template For Debt Payoff
It is useful to make a debt payoff plan that starts from the zero level. This will allow you to track your progress and adjust your budget as necessary.
Using Tally is a great tool when paying off debt.
Time for you to Start with the 0 Budgeting Method
A zero based budget is a financial planning strategy where every dollar in the budget is assigned a purpose. This differs from traditional budgeting where the focus is on last month’s spending and last year’s income.
With a zero based budget, you start fresh each month and assign every dollar a job or responsibility. This way, you can ensure that your money is being put to its best use.
When you use a zero based budget template, you are able to track every dollar that you spend.
This comprehensive view gives you a clear idea of where your money is going and where you can cut back on spending. Additionally, using a zero based budget template makes it easy to see if there have been any areas where you could save money.
The best part is you are comfortable knowing that all of your living expenses are accounted for.
This means that you can spend money without worrying about jeopardizing your financial health.
Know someone else that needs this, too? Then, please share!!
Save more, spend smarter, and make your money go further
When it comes to saving for the future, the most commonly asked questions are “what funds should I choose for my 401(k) or IRA?” and “how much should I save per month?”. If you’re like most people, you likely zero your focus in on the former. However, in the grand scheme of things, shifting your focus to how much money you should be saving per month is the smarter, more efficient way to build your funds.
Every month, some money is added to (or subtracted from) your 401(k) or IRA due to factors beyond your control. Your stocks go up or down. A bond fund pays a dividend. In short, market stuff happens and with every month, you add some money to your account. If the amount of money you add is bigger than the effect of the market fluctuations, then your savings rate becomes significantly more important than your investment performance.
What is the savings rate?
Your savings rate is the amount of money you save every month expressed as a percentage or ratio of your overall (gross) income. The higher the savings rate, the more money you save per month. Your savings rate is often regarded as one of the most critical elements of your long-term financial planning. It’s also one of the few factors you can directly influence by making strategic choices. Ultimately, your personal savings rate can be one of the most telling percentages to account for when assessing your retirement savings success.
According to a 2005 Federal Reserve data report, the U.S. personal savings rate hovered between 2.5 and 3%. This rate is alarmingly low and indicates that it could take nearly 40 years of saving to equate one year of living savings in retirement. This past national average also signals back to the previous point— in 2005, more people were focused on building their retirement accounts than actually stashing away disposable income for future planning.
How to calculate your savings rate
Using the savings rate formula is a simple three-step process:
Add up net savings
This should include all non-retirement savings and your retirement savings for the year (including employer retirement contributions). This number could very well end up being negative if you had net debt rather than net savings for the allotted time period. For example, taking a withdrawal from any savings account or taking a loan from a savings account would be a reduction against anything you saved.
Calculate total income
Add your total take home pay plus any pre-tax savings (including employer contributions).
Divide total net savings by total income
Take your total net savings from Step 1 and divide it by your total income in Step 2. Multiply the outcome number by 100 to convert it to a percentage.
Example: You make $50,000 a year and you save $5,000 to your 401K. You had to withdraw $1,000 from your Roth IRA earlier in the year to pay for an unexpected expense but you added $500 back to your Roth IRA by the end of the year. Your employer also contributes $2,500 to your 401K for you.
Your net savings is:
$5000-1000+500+2500 = $7,000
Your total income is:
$50000+5000+2500 = $57,500
Your Savings Rate is:
$7000/57500 = 0.1217
0.1217*100 = 12.17%
What influences the savings rate?
From the state of the economy and fluctuations in market interest to age and wealth, there are a number of different factors that directly influence the savings rate.
Economic factors, such as economic stability and personal earnings, are critical for the calculation of savings rates. Intervals of extreme economic volatility, such as recessions and global crises, typically lead to a rise in investment as consumers minimize their usual spending habits in order to brace for an unpredictable future. However, on the opposite end, periods of exponential economic growth can also build optimism and trust that stimulates a comparatively higher percentage of consumption.
Income and wealth significantly affect the savings rate because there is a positive correlation between the per capita gross domestic product (GDP) and savings. Generally speaking, low-income households tend to spend the majority of their income on everyday essentials and needs as opposed to wealthier people who can afford to stash away regular portions of their income toward saving for the future.
Shifts in market interest can also have an impact on the savings rate. Higher interest rates may lead to lower average spending and higher investment levels. This is a result of the substitution effect— being able to spend more in the future outweighs the revenue effect of retaining existing income earned from interest payments for most households.
Personal savings rate example
To give a more concrete understanding of personal savings rate, let’s use a real-life example to better illuminate the purpose and meaning of this percentage. Say there are two people who work at the same job with exactly the same pay. One saves 5% and earns 10% annual returns while the other saves 10% and earns 5% annual returns. Based on the personal savings rate calculation, it will take over 25 years for the employee with the 10% return to come out ahead.
There are two key lessons here you can take away. First: on your first day of work, immediately save 10% of your gross pay and keep doing so forever. Mathematically, if you are employed and working for 45 years starting at age 20 and you consistently stash away 10% of your income, you’ll end up with enough money to retire comfortably.
The second lesson: if you hit the middle of your career and are still making avoidable investment mistakes like market timing, day trading, and performance chasing, consider changing your strategy. It’s a much more worthwhile venture to learn how to diversify your portfolio and keep costs and risk as low as possible to properly build a financially stable future.
How to increase your savings rate
Bolstering your savings rate is primarily about strategic budgeting, but there are a number of different elements to consider when creating a plan to improve your personal savings rate. Use the tips below to get a head start on building your savings rate.
Tip #1: Cut your spending
It’s vital to examine your current budget and evaluate the areas in which you may be able to cut costs. Identifying these places where you can eliminate ensures that you have ample opportunity to dedicate more of your monthly income toward savings. Every dollar counts, so when going through your budget, be meticulous and intentional about any spending shifts to maximize your saving potential.
Tip #2: Increase your income
The best way to save more money is by making more money. Though that is far simpler said than done, there are a few easy ways you can increase your income without making any significant changes to your existing lifestyle.
Consider the following:
Tip #3: Automate your savings
Instead of depending on yourself to remember to stash away a certain amount of money toward your savings account, introduce yourself to automated saving. One of the simplest ways to do this is by setting up automatic recurring transfers. The moment you get paid, a specified amount of cash will transfer into your savings account, no manual switching needed.
What about investments?
How many people do you know who started saving for retirement at age 20 and haven’t been unemployed, or taken a 401(k) loan, or gone off to India in search of themselves, before they hit age 65? In their 2011 retirement confidence survey, the Employee Benefit Research Institute found that 70 percent of Americans believe they are “a little” or “a lot” behind schedule. The best thing we can do to increase our retirement nest egg is to (snooze alert) save more and spend less. In attempting to do so, many turn to making various investment choices.
Investment choices are undoubtedly important, especially once you’ve accumulated a sizable chunk of savings. It can be fun, scary, and mysterious, and with the chance of earning a huge amount of money if you play your cards right, investing is downright attractive. But it goes without saying that making money is a lot more alluring than saving money. And that’s exactly why it’s so important.
By focusing on bettering your personal savings rate, you’ll enjoy the long-term benefits without any risk or chance involved. By stashing away disposable income for future planning, you can effectively escape the game of chance and gain the assurance you need in growing your own savings on your own terms. Also, money makes money – the more invested, the more you will make.
The silver lining of saving more
Last question: is it better for your 401(k) balance to go up because you’re saving more or because your investments are performing well? Or does it matter?
It matters. Improving your balance by saving more is better. Once you retire, you’ll be using your savings to pay expenses. The lower your expenses before retirement, the easier it will be to cover them from your nest egg. And when your savings rate goes up, your expenses (as a percentage of your pay) have to go down, right? Or, you can just increase your savings rate each time you get a raise to cover the difference.
Maybe the secret of a comfortable retirement isn’t about savings rate or investment performance: it’s about redefining “comfortable.”
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.
Save more, spend smarter, and make your money go further
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Save more, spend smarter, and make your money go further
When it comes to saving for the future, the most commonly asked questions are “what funds should I choose for my 401(k) or IRA?” and “how much should I save per month?”. If you’re like most people, you likely zero your focus in on the former. However, in the grand scheme of things, shifting your focus to how much money you should be saving per month is the smarter, more efficient way to build your funds.
Every month, some money is added to (or subtracted from) your 401(k) or IRA due to factors beyond your control. Your stocks go up or down. A bond fund pays a dividend. In short, market stuff happens and with every month, you add some money to your account. If the amount of money you add is bigger than the effect of the market fluctuations, then your savings rate becomes significantly more important than your investment performance.
What is the savings rate?
Your savings rate is the amount of money you save every month expressed as a percentage or ratio of your overall (gross) income. The higher the savings rate, the more money you save per month. Your savings rate is often regarded as one of the most critical elements of your long-term financial planning. It’s also one of the few factors you can directly influence by making strategic choices. Ultimately, your personal savings rate can be one of the most telling percentages to account for when assessing your retirement savings success.
According to a 2005 Federal Reserve data report, the U.S. personal savings rate hovered between 2.5 and 3%. This rate is alarmingly low and indicates that it could take nearly 40 years of saving to equate one year of living savings in retirement. This past national average also signals back to the previous point— in 2005, more people were focused on building their retirement accounts than actually stashing away disposable income for future planning.
How to calculate your savings rate
Using the savings rate formula is a simple three-step process:
Add up net savings
This should include all non-retirement savings and your retirement savings for the year (including employer retirement contributions). This number could very well end up being negative if you had net debt rather than net savings for the allotted time period. For example, taking a withdrawal from any savings account or taking a loan from a savings account would be a reduction against anything you saved.
Calculate total income
Add your total take home pay plus any pre-tax savings (including employer contributions).
Divide total net savings by total income
Take your total net savings from Step 1 and divide it by your total income in Step 2. Multiply the outcome number by 100 to convert it to a percentage.
Example: You make $50,000 a year and you save $5,000 to your 401K. You had to withdraw $1,000 from your Roth IRA earlier in the year to pay for an unexpected expense but you added $500 back to your Roth IRA by the end of the year. Your employer also contributes $2,500 to your 401K for you.
Your net savings is:
$5000-1000+500+2500 = $7,000
Your total income is:
$50000+5000+2500 = $57,500
Your Savings Rate is:
$7000/57500 = 0.1217
0.1217*100 = 12.17%
What influences the savings rate?
From the state of the economy and fluctuations in market interest to age and wealth, there are a number of different factors that directly influence the savings rate.
Economic factors, such as economic stability and personal earnings, are critical for the calculation of savings rates. Intervals of extreme economic volatility, such as recessions and global crises, typically lead to a rise in investment as consumers minimize their usual spending habits in order to brace for an unpredictable future. However, on the opposite end, periods of exponential economic growth can also build optimism and trust that stimulates a comparatively higher percentage of consumption.
Income and wealth significantly affect the savings rate because there is a positive correlation between the per capita gross domestic product (GDP) and savings. Generally speaking, low-income households tend to spend the majority of their income on everyday essentials and needs as opposed to wealthier people who can afford to stash away regular portions of their income toward saving for the future.
Shifts in market interest can also have an impact on the savings rate. Higher interest rates may lead to lower average spending and higher investment levels. This is a result of the substitution effect— being able to spend more in the future outweighs the revenue effect of retaining existing income earned from interest payments for most households.
Personal savings rate example
To give a more concrete understanding of personal savings rate, let’s use a real-life example to better illuminate the purpose and meaning of this percentage. Say there are two people who work at the same job with exactly the same pay. One saves 5% and earns 10% annual returns while the other saves 10% and earns 5% annual returns. Based on the personal savings rate calculation, it will take over 25 years for the employee with the 10% return to come out ahead.
There are two key lessons here you can take away. First: on your first day of work, immediately save 10% of your gross pay and keep doing so forever. Mathematically, if you are employed and working for 45 years starting at age 20 and you consistently stash away 10% of your income, you’ll end up with enough money to retire comfortably.
The second lesson: if you hit the middle of your career and are still making avoidable investment mistakes like market timing, day trading, and performance chasing, consider changing your strategy. It’s a much more worthwhile venture to learn how to diversify your portfolio and keep costs and risk as low as possible to properly build a financially stable future.
How to increase your savings rate
Bolstering your savings rate is primarily about strategic budgeting, but there are a number of different elements to consider when creating a plan to improve your personal savings rate. Use the tips below to get a head start on building your savings rate.
Tip #1: Cut your spending
It’s vital to examine your current budget and evaluate the areas in which you may be able to cut costs. Identifying these places where you can eliminate ensures that you have ample opportunity to dedicate more of your monthly income toward savings. Every dollar counts, so when going through your budget, be meticulous and intentional about any spending shifts to maximize your saving potential.
Tip #2: Increase your income
The best way to save more money is by making more money. Though that is far simpler said than done, there are a few easy ways you can increase your income without making any significant changes to your existing lifestyle.
Consider the following:
Tip #3: Automate your savings
Instead of depending on yourself to remember to stash away a certain amount of money toward your savings account, introduce yourself to automated saving. One of the simplest ways to do this is by setting up automatic recurring transfers. The moment you get paid, a specified amount of cash will transfer into your savings account, no manual switching needed.
What about investments?
How many people do you know who started saving for retirement at age 20 and haven’t been unemployed, or taken a 401(k) loan, or gone off to India in search of themselves, before they hit age 65? In their 2011 retirement confidence survey, the Employee Benefit Research Institute found that 70 percent of Americans believe they are “a little” or “a lot” behind schedule. The best thing we can do to increase our retirement nest egg is to (snooze alert) save more and spend less. In attempting to do so, many turn to making various investment choices.
Investment choices are undoubtedly important, especially once you’ve accumulated a sizable chunk of savings. It can be fun, scary, and mysterious, and with the chance of earning a huge amount of money if you play your cards right, investing is downright attractive. But it goes without saying that making money is a lot more alluring than saving money. And that’s exactly why it’s so important.
By focusing on bettering your personal savings rate, you’ll enjoy the long-term benefits without any risk or chance involved. By stashing away disposable income for future planning, you can effectively escape the game of chance and gain the assurance you need in growing your own savings on your own terms. Also, money makes money – the more invested, the more you will make.
The silver lining of saving more
Last question: is it better for your 401(k) balance to go up because you’re saving more or because your investments are performing well? Or does it matter?
It matters. Improving your balance by saving more is better. Once you retire, you’ll be using your savings to pay expenses. The lower your expenses before retirement, the easier it will be to cover them from your nest egg. And when your savings rate goes up, your expenses (as a percentage of your pay) have to go down, right? Or, you can just increase your savings rate each time you get a raise to cover the difference.
Maybe the secret of a comfortable retirement isn’t about savings rate or investment performance: it’s about redefining “comfortable.”
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.
Save more, spend smarter, and make your money go further
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As part of back to basics month, let’s use today to explore how you can get out of debt without gimmicks or games.
After twelve years of reading and writing about money, I’ve come to believe that debt reduction ought to be a side effect and not a goal. Getting out of debt is a target, not a habit. And, as we’ve been discussing recently, good goals are built around actions instead of numbers. If you restructure your life so that you’re spending less than you earn, you will get out of debt. It’s a natural side effect.
Having said that, I realize that a lot of GRS readers are struggling to get to square one. Getting out of debt is their goal and primary obsession. That’s okay.
Before you can begin repaying your debt, you must be earning a profit. Unless your income exceeds your expenses, your debt is actually increasing. If you’re continuing to add debt, or if you’re only able to make minimum payments, you must first find ways to spend less and earn more until you have a positive “saving rate”. (Both businesses and people earn profits. But when individuals earn a personal profit, we call it “savings”.)
After you’re earning a personal profit, you can (and should) make debt elimination a priority.
Why You Should Pay Off Your Debt
Debt repayment can improve your credit score, meaning you’ll pay less on everything from rent to car insurance to future borrowing needs. Plus, debt reduction is one of the best returns you can earn on your money.
Investing in the stock market provides an average annual return of about 10% — but that return isn’t guaranteed. Some years the market is up 30%, but other years it drops by 40%. When you pay down a credit card, you earn a guaranteed return of 20% (or whatever your interest rate is). That’s tough to beat.
There are also non-financial benefits to paying off debt, including:
Simplicity. The more debt you have, the more bills you have. It’s easier to manage your money when you have a simple, efficient financial infrastructure. Each time you pay off a debt, you move one step closer to this ideal.
Cash flow. Whenever you eliminate a debt, the money formerly used for that monthly payment becomes available to pursue other goals – including fun stuff like ski trips and knitting supplies.
Freedom. When you have monthly payments to meet, you’re chained to your job. You’re unable to take risks. Once your debt is gone, a wider range of options becomes available to you.
Peace of mind. Best of all, once you’re debt-free, you can sleep easier at night. You’ll put less pressure on yourself, and you’ll have fewer fights about money with your partner.
When I first tried to get out of debt, I lacked a system. Without a plan, I sent extra money to one credit card and then another. As a result, I never seemed to make any progress.
After deciding to become boss of my own life, however, I researched how to get out of debt. Many books recommended a strategy called the “debt snowball”. Although I was skeptical, I gave it a try. The method worked. Using it, I managed to eliminate my debt and begin saving for the future.
Stop Acquiring New Debt
This may seem self-evident, but the reason your debt is out of control is that you keep adding to it. Stop using credit. Don’t finance anything. Cut up your credit cards.
That last one can be tough. Don’t make excuses. I don’t care that other personal finance sites say that you shouldn’t cut them up. Destroy them. Stop rationalizing that you need them.
You don’t need credit cards for a safety net.
You don’t need credit cards for convenience.
You don’t need credit cards for cash-back bonuses.
You don’t need credit cards at all. If you’re in debt, credit cards are a trap. They only put you deeper in debt. Later, when your debts are gone and your finances are under control, maybe then you can get a credit card. (I don’t carry a personal credit card. I don’t miss having one.)
After you destroy your cards, halt any recurring payments. If you have a gym membership, cancel it. If you automatically renew your World of Warcraft account, cancel it. Cancel anything that automatically charges your credit card. Stop using credit.
Once you’ve done this, call each credit card company in turn. Do not cancel your credit cards (except for those with a zero balance). Instead, ask for a better deal. Find a low interest credit offer online and use it as a bargaining wedge. Your bank may not agree to match competing offers, but it probably will. It never hurts to ask.
Establish an Emergency Fund
For some, this is counter-intuitive. Why save for an emergency fund before paying off debt? Because if you don’t save first, you’re not going to be able to cope with unexpected expenses. Do not tell yourself that you can keep a credit card for emergencies. Destroy your credit cards; save cash for emergencies.
How much should you save? Ideally, you’d save $1,000 to start. (College students may be able to get by with $500.) This money is for emergencies only. It is not for beer. It is not for shoes. It is not for a Playstation 3. It is to be used when your car dies, or when you break your arm in a touch football game.
Keep this money liquid, but not immediately accessible. Don’t tie your emergency fund to a debit card. Don’t sabotage your efforts by making it easy to spend the money on non-essentials. Consider opening an online savings account. When an emergency arises, you can easily transfer the money to your regular checking account. It’ll be there when you need it, but you won’t be able to spend it spontaneously.
The Debt Snowball
With the debt snowball, you set aside a specific amount of cash each month to pay off the money you owe. At first, progress is slow. In time, however, you begin to make rapid progress, picking up speed like a snowball rolling downhill.
Step One
The first step is to make a list of your debts. For each obligation, include the balance you owe, the interest rate, and the minimum payment. Arrange the list so that the debt with the highest interest rate is on top. Next comes the debt with the second-highest interest rate, and so on, until you reach the final debt on the list, which will be the one with the lowest interest rate.
For instance, here’s the actual list of my debts from October 2004, ordered by interest rate:
Computer Loan: $1116 @ 15% ($48 min)
Business Loan $2800 @ 11% ($30 min)
Home Equity Loan $21000 @ 6% ($100 min)
Car Loan $2250 @ 5% ($170 min)
Personal Loan $1600 @ 3% ($100 min)
Personal Loan $6430 @ 0% ($60 min)
I had $35,196 in debt and my minimum payments totaled $508 per month.
Step Two
Once you’ve listed your debts, decide how much you can afford to pay toward them each month in total. This should be at least the total of your minimum payments ($508 in the example above), and preferably more. In my case, I started by allocating $700 every month toward debt reduction.
Step Three
Now, for all of your debts except the debt with the highest interest rate, make minimum payments every month. Use the rest of the money you’ve allocated for debt reduction to pay down the debt with the highest interest rate.
The computer loan topped my list of debts with an interest rate of 15%. The minimum payments for the other debts combined to $460 per month. Under this plan, I’d then take the remainder of the $700 I’d allocated toward monthly debt reduction and apply it to the computer loan. Instead of making the $48 minimum payment, I’d pay $240.
Step Four
Repeat this process every month until the debt at the top of the list has been eliminated.
Step Five
Here’s where this method gets powerful. With your first debt defeated, you don’t use your improved cash flow to buy new things. Instead, you use the extra cash to attack the next debt on your list.
If I start by applying $700 toward debt each month, for example, I continue to apply $700 toward debt each month until all of the debt is gone. After the computer loan is retired, I focus on the business loan. Because the minimum payment on my other debts would be $430, I could funnel $270 to pay off the business debt every month.
When the business debt is gone, I’d then throw $370 per month at the home equity loan, and so on. Ultimately, I’d be left with a single loan: the $6430 personal loan at 0% interest. Every month, I’d apply all $700 to get rid of this debt.
Pros and Cons
The debt snowball is powerful and effective. Mathematically, it’s the best way to get rid of your debt. There’s just one problem.
When you attack your debts from highest interest rate to lowest, you’ll pay less money in the long run. Unfortunately, many folks – including me – find the going difficult. In my case, I hit a wall when I reached the third debt on the list, my home equity loan. That $21,000 balance was going to take years to repay. I didn’t have that kind of patience.
Fortunately, I learned there were other ways to order your debts. You don’t have to tackle the high interest rates first.
Building a Better Snowball
Humans are complex psychological creatures. They’re not adding machines. Many of us know what we ought to do but find it difficult to actually make the best choices. (If we were adding machines, we wouldn’t accumulate consumer debt in the first place!) It’s misguided to tell somebody so deep in debt that they must follow the repayment plan that minimizes interest payments. The important thing to do is to set up a system of positive reinforcement.
Because of this, many people prefer slight variations on the debt snowball method. These methods ignore math in favor of psychology.
Dave Ramsey’s Debt Snowball
Financial guru Dave Ramsey has popularized one variation of the debt snowball. Instead of ordering your debts by interest rate, he suggests you attack those with the lowest balances first.
Using Ramsey’s method, my debts from 2004 would be ordered like this:
Computer Loan: $1116 @ 15% ($48 min)
Personal Loan $1600 @ 3% ($100 min)
Car Loan $2250 @ 5% ($170 min)
Business Loan $2800 @ 11% ($30 min)
Personal Loan $6430 @ 0% ($60 min)
Home Equity Loan $21000 @ 6% ($100 min)
As with the standard debt snowball method, I’d make minimum payments on each debt except the top one on the list. At it, I’d throw everything else I’ve allocated for debt reduction each month. When the top debt was eliminated, I’d move on to the one with the next smallest balance.
Ramsey’s variation isn’t as quick as paying high-interest debt first, and in the long-run, you’ll lose slightly more to interest payments. (In my own case, the projections showed it’d take an extra month to repay my debt and I’d pay and extra $841.15 in interest.) However, there’s a psychological advantage to doing things this way.
By attacking your smallest debts first, you get some quick wins, which provide a mental boost. This psychological lift provides extra motivation to keep attacking that debt. Every few months, you get the satisfaction of crossing another debt off the list! Ramsey says this is “behavior modification over math”, and he’s right. In fact, I opted to use this variation of the debt snowball when I repaid my own $35,000 of debt in 39 months.
Adam Baker’s Debt Tsunami
Other experts, including my buddy Adam Baker from Man vs. Debt, suggest yet a third alternative they call the debt tsunami. They argue it’s best to pay off your debts in order of their emotional impact. Attack your debts from smallest balance to highest, they say, but for added psychological boost, prioritize any debt that particularly bugs you.
“I used to be addicted to gambling,” Baker says, “and I had debt that was specifically associated with gambling. To pay that off first changed me as a person. To pay off the $600 I owed on a credit card was great, but it didn’t change me. It didn’t signify that my life was going to be different and that I was going to live in a different way.”
But paying off his gambling debt did mean something to him, so Baker attacked that first.
Here’s another example: Many people borrow money from their parents. These loans may carry interest rates of only two or three percent (or maybe they’re interest free), but they come with a lot of psychological baggage. This is another instance where it might make sense to pay down low-interest debt first because the non-financial rewards are so great.
The most important thing when paying off your debts is to pay off your debts; the order in which you do so is ultimately irrelevant. Find a system that works for you and develop the discipline to stick with it.
Note: It’s less imperative to repay low-interest debt. Businesses use “leverage” to borrow money cheaply so that they can earn higher returns elsewhere. You do the same when taking out a mortgage at low rate (like three percent) or using school loans to improve your education (which will, in theory, provide high future returns). It’s good to repay all of your debt, of course, but it’s okay to make repaying the mortgage a long-term goal instead of lumping it in with your debt snowball.
Supplementary Solutions
You can do other things to improve your money situation while you’re working on these three steps.
First, focus on the fundamental personal finance equation: to pay off debt, or to save money, or to accumulate wealth, you must spend less than you earn.
Curb your spending. Re-learn frugal habits. (Frugality is something with which most college students are all too familiar.) You can find some great ideas in the archives of this site. Also check Frugal for Life.
While you work to spend less, do what you can to increase your income. If possible, sell some of the stuff you bought when you got into debt. Get an extra job. (But don’t neglect your studies for the sake of earning more. Your studies are most important.)
Finally, go to your local public library and borrow Dave Ramsey’s The Total Money Makeover. Don’t be put off by the title — this is a fantastic guide to getting out of debt and developing good money habits. I rave about it often, but that’s because it has done so much to help my own personal finances. After you’ve finished, return it and borrow another book about money.
Simple, Not Easy
Human beings are complex creatures. Some of us are highly logical. Some of us are emotional. Most of us fall someplace in between. We rarely make decisions based on optimal paths; more often, we choose what makes us happy in the short term. I’m not saying that this is the right thing to do — it’s just what happens. For those who routinely make financial decisions based on emotion, it can be difficult to turn things around.
Complaining that personal finance is easy and “why doesn’t everyone do what they ought” is like saying that running a marathon is easy so why can’t everybody run one? Most of us understand how to prepare for a marathon — eat right and run a hell of a lot — but few of us have the dedication and mental fortitude to complete one. However, with a little discipline and some hard work, most people can complete a 10k race.
It’s the same with personal finance. It’s easy to say, “To build wealth, you must spend less than you earn”, but it’s another thing to do it, especially over the long term. In some ways, building wealth is more difficult than running a marathon. Training for and completing a marathon takes months. Dedicating yourself to a sensible financial plan is a lifetime process.
If personal finance were really as simple as understanding the math, we would all be rich. But it’s not. And we’re not. That’s why I think any small financial victory is important. That’s why I run this web site, and why I share whatever tips I can find.
I always say “do what works for you”“. Some people are able to succeed by paying high-interest debt first. But some people — myself included — have only been able to succeed by trying another approach. The approach may not be best from a mathematical viewpoint, but I believe that any method that actually helps you meet your goals is better than one that doesn’t.
Personal finance concepts might be simple, but that doesn’t mean they’re easy. I don’t mean to imply that they are. It took a lot of hard work (and a little luck) for me to get out of debt. It didn’t happen quickly, and it wasn’t easy.
The Bottom Line
As I mentioned at the start, I’ve come to believe that debt repayment is a side effect and not a goal. You shouldn’t make it your primary purpose.
If you do the other things I recommend, such as creating a personal mission statement and boosting your profit margin, you’ll naturally pay off debt as a matter of course. But you’ll enjoy a benefit many people don’t have once their debts are gone.
You see, a lot of people feel lost once they’ve dug out of debt. Search online and you’ll find tons of questions and conversations about what to do next. Debt repayment had given them purpose, and now that purpose is gone. As a result, they lose financial direction. And like a dieter who had aimed for a weight instead of a lifestyle change, an unfortunate few of the newly debt-free find themselves resuming bad habits.
If you’re pursuing other goals and intentionally building good habits, you’ll get out of debt. And once you get out of debt, the good times will continue: That debt snowball you’ve been building will transform itself into a wealth snowball.
Congratulations! You’re on your way to financial freedom!
Have you ever had to dig out of debt? What methods did you use? Were some more successful than others? If you had to do it over again, would you have done anything differently? What advice would you give to others who have just taken on the role of money boss in their lives?
By Peter Anderson5 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited December 21, 2010.
A few weeks ago I published my post called “75 Frugal Gifts You Can Give For Christmas“. The post was an extensive list of frugal gift ideas, gifts that people could buy or make for their loved ones, but not break the bank. One of my favorite gift ideas from the list was one that in my opinion is good for more than just one year, it is the gift that keeps on giving. What was it? The gift of stock.
When I wrote the post I was thinking of somehow buying a single share of stock or giving them a check to open a brokerage account or something along those lines. In the end the idea lacked something because it wasn’t very easy to implement, and it didn’t allow for the type of investing that I would prefer to do, via index funds.
A couple of weeks ago I found the answer to how you can give someone the gift of stock, but a bit easier. And it came from one of my favorite brokerage companies, ING ShareBuilder (review) . They also have one of my favorite bank accounts, ING Direct Online Savings (review)!
ShareBuilder Gift Of Stock
ShareBuilder released something this year actually called the “Gift of Stock“. Basically it’s everything you need to start investing included in the package. Who would this be a good gift for? A friend or family member that might need that boost to start investing, or it can be a great teaching tool to help your kids get interested in saving for the future.
Here are the contents of the package from ING:
$50 ShareBuilder Gift Card. Help friends and family start their own stock portfolio at ShareBuilder or become an investor yourself. The gift card is redeemable when opening a new ShareBuilder Individual, Joint or Custodial account, giving you or the gift recipient the chance to start off with $50 in their account. ShareBuilder has no account minimums.
Five Free Automatic Investment Plan Credits. Free trade credits allow you, friends or family to start building wealth. ShareBuilder’s Automatic Investment Plan allows investors to set up recurring investments with a dollar amount they can afford.
Five-part video series from The Motley Fool. Picking stocks can be easier than you think. The Motley Fool’s How to Buy the Right Stocks for Your Portfolio video series can help you develop the right financial portfolio for your financial goals.
It’s really that easy. When they get the package they can setup a new account at ING ShareBuilder, redeem their gift cards for $50 of stock and 5 free automatic investment plan credits, and start investing!
Gift Of Stock Price Drop!
Originally this gift of stock was retailing for $45 on the ING store, but as of this week the price has dropped to only $25. So get in on this hot deal now! You could even buy it for yourself to get started investing you want to! You’ll get a return for your money right out of the box since you get $50 in ShareBuilder credit for only $25!
Here’s my unboxing video of my own “Gift of Stock” package. Click to watch and see everything that’s included inside.
Want to open your own ShareBuilder account? Open your account here. (Get a $50 account bonus with promo code: 50ws10)
As a child growing up, I remember my father constantly eating Ramen Noodles in a Styrofoam cup.
It was pretty fascinating that all you had to do was add hot water, and presto, you had a ready to eat meal in a few minutes.
Perfect for an impatient kid!
As I got older I started to notice that the package of Ramen Noodles still existed in our kitchen.
My father had always struggled with money.
He had battled credit card debt and never really made good financial “cents” of his money.
I guess I always just thought that he really liked the cup of Ramen Noodles.
I later found it there was much more to the story.
All Too Familiar Feeling
I remember my first year as a financial advisor. I was meeting with a couple in their early 60s. At the time, I was 24 years old and already started a Roth IRA and was quickly learning the proper ways to invest in your 20s. I remember this couple in particular because while many people get excited about retiring and starting a new venture in their life, with these folks, retirement was nowhere in the near future.
Combined, they had maybe $50,000 saved in their retirement investment accounts combined. Their jobs offered no pensions, so all they had was social security.
I remember looking at this couple, and eerily, I saw similarities with my father. They had no hope of retiring. They had done a horrible job of saving.
The Ramen Noodles Jolt
This meeting instantly made me realize that I did not want to follow in their footsteps.
I knew that I did not want to be in my early 60s and be forced to be eating cup of Ramen Noodle soup.
I didn’t want to have to worry about not ever being able to retire. I know at the age of 24, I was thinking much more different than my peers. None of my friends talked about retirement. We talked about the next trips that we were going to go on, what concerts we wanted to go see, still reflecting back on the good old college days.
Investing in Your 20s Isn’t Cool, It’s a Must
I write this because if you are in your 20s, I know you’re thinking the exact same thing, even if it’s just how to invest with 100 dollars. What’s the point of investing? What’s the point of saving? What’s the point of even thinking about retirement?
Here’s one thing I know, you don’t want to be eating Ramen Noodles for dinner for the rest of your life. It might be good every once in a while, but I promise you, you get sick and tired of it.
So, why is it so important to start investing early in your 20s?
Most young people just don’t get it. They think they have plenty of time to start thinking about retirement. While, yes that’s true, what most don’t understand or appreciate is that the sooner you start, the easier it is.
You don’t want to discover you’ve waited until it is too late to retire.
For example, look at this chart. This chart was something that was shown to me whenever I was junior in college. The chart literally blew me away.
The chart has two young adults that should be investing in their 20s: Super Saver Parker who starts at the age of 25 and Super Slacker Sloane. Both graduate with good paying jobs and have well enough income to start contributing to a Roth IRA.
Super Saver Parker
10 Years of Contributions
Super Slacker Sloane
30 Years of Contribution
25
$2,000
25
–
26
$2,000
26
–
27
$2,000
27
–
28
$2,000
28
–
29
$2,000
29
–
30
$2,000
30
–
31
$2,000
31
–
32
$2,000
32
–
33
$2,000
33
–
34
$2,000
34
–
35
–
35
$2,000
36
–
36
$2,000
37
–
37
$2,000
38
–
38
$2,000
39
–
39
$2,000
40-65
–
40-65
$50,000
Total Contributions
$20,000
$60,000
Ending Account Value
$340,060
$266,427
*BIG* Difference
$73,633
Super Saver Parker starts putting $2,000 a year into his Roth IRA ($166.67 per month). He does this for a total of 10 years and stops for a grand total of $20,000 he put in. Why does he stop? Don’t ask. That’s just part of the illustration. 🙂
Super Slacker Sloane puts off saving because he wants to buy “stuff” (otherwise knows as “crap you don’t need”). He finally gets it and starts putting $2,000 a year starting at the age of 35. Wanting to catch Parker, he puts in $2,000 a year for 30 years contributing $60,000 in total – $40,000 more than Parker. *We’re assuming that they both average 8% return on their money.
After they showed this chart to me in my finance class, the question that was then asked was,
“Who will have more money at the age of 65?”
I remember my initial thought was “Duh, the guy who put in $40,000 of course!“.
Hmmm…..oh how wrong I was.
The reality is that the person who started 10 years earlier (preferably in their 20s) had actually made $73,633 more even though they put in $40,000 less.
Maybe a Chart Involving Beer Will Help?
Not convinced? Here’s something else to look at:
Sounds great, right? Being able to retire, not having to eat Ramen, being able to drink a gigantic tower of beer… all wonderful.
But if I had to guess there are some of you out there in your 20s — just starting careers, just starting families, just really starting to get into the swing of things — that are wondering:
How the heck do I start? I have no idea what I’m doing!
Well that’s hopefully one of the reasons you are reading my blog. I want every single one of my readers to be able to retire, and if I have to show each one how to do it then that’s what I’m going to do.
Resources for Getting Started on Your Retirement Saving
Here are some resources I’ve created to help you jump start your retirement savings.
Best Online Brokers for Beginners
With the large number of brokerage firms out there it can be really confusing deciding where to open an account. There are some brokers out there that are only for “professional” investors that trade a lot and need all kinds of crazy chart tracking.
If you’re just starting and investing in your 20s then that isn’t you.
I’ve boiled down your best online broker options for you to make the selection that much easier.
I like really simple, and beginner investors should too.
The Roth IRA is one of the best investment accounts to have to grow your nest egg for your retirement.
Naturally, you put the two together and you get a great result.The Roth IRA Movement
Last year I helped start the Roth IRA Movement to encourage young people to open and fund Roth IRAs. Over 140 bloggers jumped in to add their own articles and it was a huge success. The link above takes you to an easily accessible list of all of the posts. A lot of good reading here.
Start Saving for Retirement In Your 20s
No matter which broker you go with or what investment philosophy you end up selecting… please do not delay in starting your retirement savings. Investing in your 20s is the absolute way to go. Literally every day that goes by without saving for the future the harder you will need to work and save to meet the same goal.
Let your money work for you by giving it the maximum amount of time to be invested. Don’t end up eating Ramen Noodles and waiting for your next Social Security check. That’s no way to live your golden years.
Illinois is home to Chicago, one of the most populous cities in the U.S. But whether you live in Chicago, Joliet, Carbondale, or one of the many small towns in Illinois, there’s a bank for you.
The state is home to a wide range of bank branches, from large, national banks to small lenders and credit unions. When you’re ready to shop banks in Illinois, there are several factors to consider.
10 Best Banks in Illinois
1. BMO Harris
Although BMO Harris is a regional bank, it’s headquartered in Chicago, so it has a heavy Illinois presence. The bank has been around since 1882 and has long been considered one of the best banks in Illinois.
In addition to branches in Illinois, Indiana, Arizona, Missouri, Minnesota, Kansas, Florida, and Wisconsin, BMO Harris also offers ATM access through the MoneyPass network. They have a checking account option with no monthly maintenance fees, as well as a robust mobile banking app to manage your account.
Fees:
No monthly service fee
$15 overdraft fee
Balance requirements:
$25 opening deposit
No minimum daily balance required
ATMs:
Fee-free at 40,000+ BMO Harris and MoneyPass ATMs nationwide
$3 fee for out-of-network transactions
Interest on balance:
0.01% APY on savings
Additional perks:
Spending habit analysis available in mobile app
Competitive loan rates
2. U.S. Bank
Illinois residents looking for a national bank should check out U.S. Bank. U.S. Bank has ATMs across Illinois and the rest of the country, and a full selection of savings accounts and checking accounts, as well as an online banking option.
Currently, one of U.S. Bank’s best deals is its Bank Smartly Checking account, which pays interest on your balance and currently offers a $300 sign-up bonus. What makes this one of the best checking accounts, though, is that if you enroll in Smart Rewards, you’ll earn rewards based on your account balance.
Fees:
$6.95 monthly fee (waived with qualifying direct deposits or minimum balance)
$36 overdraft fee (waived up to $50)
Balance requirements:
$25 minimum deposit to open
No minimum daily balance required
ATMs:
Fee-free at 4,700 ATMs nationwide
$2.50 transaction fee for each out-of-network ATM
Interest on balance:
Up to 0.05% APY on Bank Smartly checking
0.01% APY on savings
Additional perks:
Automatically move up interest tiers as your balance grows
Additional rewards for seniors, children, military, and veterans
3. Chime
Chime is another online bank that operates without local branches. You’ll have everything you need in the app, with online banking features like peer-to-peer payments and an ATM locator.
You can also sign up for a Chime High-Yield Savings Account and earn interest rates of 2.00% APY on your balance. With automatic savings features, money can be automatically moved from your checking account to savings to help you set money aside for the future.
Fees:
No monthly fees
No overdraft fees
Balance requirements:
No minimum deposit to open
No minimum daily balance required
ATMs:
Fee-free at 60,000+ ATMs nationwide
$2.50 transaction fee for out-of-network ATMs
Interest on balance:
2.00% APY on savings accounts
Additional perks:
Spot Me covers up to $200 in overdrafts
Round Ups feature automatically moves money into savings
4. Huntington Bank
Huntington Bank is a regional bank with branches in Illinois, Ohio, Colorado, Florida, Indiana, Kentucky, Michigan, Minnesota, Pennsylvania, West Virginia, and Wisconsin. There are multiple tiers of checking accounts, but if you’re looking for the basics, the Asterisk-Free Checking Account is fully free with no minimum balance requirement.
Before choosing this bank, check for branches and ATMs in your area. Cash withdrawals are only fee-free at Huntington-owned ATMs. But if you’re fine with relying on mobile banking apps for all of your banking services, you’ll likely find everything you need while traveling.
Fees:
No monthly service fee
$15 per-transaction overdraft fee after balance goes $50 in the negative
Balance requirements:
No minimum opening deposit
No minimum daily balance required
ATMs:
Fee-free at more than 1,600 Huntington Bank ATMs nationwide
$3.50 fee for each out-of-network transaction
Interest on balance:
Up to 0.06% APY on savings
Additional perks:
View current account balance without logging in
Standby Cash offers quick access to credit line
5. Chase
Those who prefer a national bank might like Chase Bank, which has branches throughout Illinois, as well as 47 other states (excluding Alaska and Hawaii). New customers can qualify for a $200 bonus by opening an account and setting up direct deposit within 90 days.
There are multiple checking account options, but Chase Total Checking is the most popular. There’s a $12 fee each month, but if you’re taking advantage of the bonus, direct deposit accounts waive the fee as long as at least $500 is coming in each month.
Fees:
$12 service fee per month (waived with $500 in qualifying deposits or $1,500 daily balance)
$34 per transaction (waived with Overdraft Assist)
Balance requirements:
No minimum deposit to open
No minimum daily balance required ($1,500 to waive $12 monthly fee)
ATMs:
Fee-free at more than 16,000 Chase Bank ATMs nationwide
$3-$5 fee for each out-of-network transaction
Interest on balance:
Up to 0.01% APY on savings
Additional perks:
$200 bonus for new checking account with direct deposit
Checking accounts available for children ages 6 to 17
6. CIT Bank
CIT Bank is an online-only bank that is geared toward helping you set money aside for the future. One notable product is the CIT Platinum Savings account, which offers 4.75 APY on balances of $5,000 or more if you deposit at least $100 monthly.
But CIT is great if you’re in the market for a checking account, too. With CIT eChecking, you get one of the rare interest checking accounts that comes with no monthly fees or minimum balance. Although there are no ATMs or branches, CIT does refund up to $30 a month for non-network ATMs.
Fees:
No monthly service fee
No overdraft fee
Balance requirements:
$100 minimum deposit to open
No minimum daily balance required
ATMs:
No CIT ATMs available
Up to $30 monthly in non-network ATM fees refunded
Interest on balance:
Up to 0.10% APY on checking
Up to 0.25% APY on checking with $25,000+ balance
Up to 4.75% APY on savings
Additional perks:
Up to 1.00% APY on savings with $100 monthly deposit
Up to 5.00% APY on CDs
7. Fifth Third Bank
Another regional bank with a heavy Illinois presence is Fifth Third Bank out of Ohio. You’ll find branches in Illinois, Ohio, Florida, Georgia, Indiana, Kentucky, Michigan, North Carolina, South Carolina, Tennessee, and West Virginia.
Fifth Third Bank offers a variety of account options, but the most popular checking account is Momentum Checking, which has no monthly fee. Your checking account comes with Extra Time, which notifies you of insufficient funds so that you can avoid overdraft fees.
Fees:
No monthly service fee
$37 overdraft fee
Balance requirements:
No minimum opening deposit
No minimum daily balance required
ATMs:
Fee-free at more than 40,000 Fifth Third and MoneyPass ATMs nationwide
$3 fee for out-of-network transactions
Interest on balance:
0.01% APY on savings
Additional perks:
Identity theft monitoring available through Trilegiant for a fee
Fifth Third Extra Time notifies you of overdrafts to let you deposit money by the end of the day
8. PNC Bank
PNC is one of the larger regional banks, with a presence in 27 states, including Illinois. Currently, you can earn a bonus of up to $200 when you open a checking account and enroll in qualifying Virtual Wallet products.
Where PNC really excels is in its online and mobile banking offerings. Its checking account comes with no monthly service fees or minimum balance requirement, and Low Cash Mode lets you manage things when funds get low.
Fees:
No monthly service fees
$36 maximum overdraft charges per day in Low Cash Mode
Balance requirements:
No minimum deposit to open
No minimum daily balance required
ATMs:
Fee-free at 60,000+ ATMs nationwide
$3 transaction fee for out-of-network ATMs
Interest on balance:
2.00% APY on savings
4.30% APY on high-yield savings account
Additional perks:
$200 bonus with Virtual Wallet signup
Low cash mode helps you when funds are low
9. Ally
While there are no physical branches, Ally Bank builds everything you need into its online and mobile banking platforms. You’ll not only get a free checking account with no fees or minimum daily balance requirement, but both checking and savings accounts offer interest on your balance.
There are some activities that mobile banking can’t handle, though. Ally has you covered on those, too. You’ll have fee-free access to 43,000 AllPoint ATMs in Illinois and nationwide. One downside is that you can’t deposit cash at partner retailers as you can with some other online-only accounts.
Fees:
No monthly service fee
No overdraft fees
Balance requirements:
No minimum opening deposit
No minimum daily balance required
ATMs:
Fee-free at more than 43,000 AllPoint ATMs nationwide
Up to $10 in fees at non-AllPoint ATMs reimbursed per statement cycle
Interest on balance:
0.25% APY on checking
3.75% APY on savings
Additional perks:
Spending buckets help you budget
Access to paycheck up to two days early
10. GO2Bank
Another online banking option open to Illinois residents is GO2Bank. You can do most of your banking through their app, including mobile check deposit, online bill pay, and the ability to manage your account.
One unique thing this mobile bank offers is the ability to deposit cash at retailers nationwide. GO2Bank’s savings accounts come with 4.50% APY on balances up to $5,000.
Fees:
$5 per month (waived with eligible direct deposit)
$15 per-transaction overdraft fee
Balance requirements:
No minimum deposit to open
No minimum daily balance required
ATMs:
Fee-free at 55,000+ ATMs nationwide
$3 transaction fee for out-of-network ATMs
Interest on balance:
4.50% APY on savings accounts
Additional perks:
Earn up to 7% by purchasing e-gift cards in the app
Deposit cash at 90,000+ retail locations nationwide
Illinois has plenty of options, whether you go with an Illinois bank or one headquartered elsewhere. The best banks in Illinois combine low fees with features that make banking convenient for you. Don’t rule out online bank options, since you can easily find one with all the features you need, along with fee-free access to local ATMs.
Finding the Best Banks in Illinois
With so many options, it can be tough to narrow down the list of the best banks in Illinois. Whether you choose a local, national, or regional bank, though, it’s important to find the one that offers what you need. Here are some features to consider in your search for a new bank.
FDIC Insurance
When you turn your money over to someone else, you’ll want to make sure it’s safe. If the economy crashes or a bank fails, you won’t want to lose your money. In the U.S., the Federal Deposit Insurance Corporation covers consumers. But that coverage is limited to $250,000 in principal and interest per depositor, per account. Additionally, investment products aren’t covered, although your money market account, individual retirement accounts, and other types of savings account options likely are.
It’s also important to note that not all banks are insured by the FDIC. Whether you’re going with a large, corporate lender or opening a checking account online, research to make sure it’s FDIC insured. Also, pay close attention to limits and make sure you don’t exceed $250,000 with each account.
ATM/Branch Access
At one time, you’d have to rely on local branches and ATMs to deposit checks and withdraw cash. But thanks to tools like Apple Pay and Samsung Pay, you don’t even have to pull out your wallet to make a purchase. Still, you’ll occasionally need some cash, which is why the best banks in Illinois go beyond digital solutions.
Whether you choose a national bank or you open an account online, pay close attention to how you’ll get that help when you need it. Many online bank accounts now partner with ATM networks like AllPoint and MoneyPass to give you that option. Some let you deposit cash through local retailers for a fee.
Low Fees, Great Features
It’s easier than ever to find a checking account with no monthly fees. Even those that do charge monthly maintenance fees will sometimes waive them as long as you have your paycheck electronically deposited or maintain a minimum balance from day to day.
But as you’re researching the best banks in Illinois, it’s important to consider all the costs. If you choose a fee-free online banking option, for instance, but you’ll be paying $10 or more a month for ATMs, it might be worth it to go with one of the national banks that charge a small monthly fee.
Advantages and Disadvantages of Local Banks
National banks have a heavy presence throughout Illinois, but some of the best banks in Illinois are smaller and more community-based. Here are some advantages of going with a local bank:
May provide more personal service
Savings account interest rates may be more competitive
Might have lower rates on auto loans and personal loans
Credit score requirements can be more flexible
There are a few disadvantages, as well, including:
Online banking features might not be as developed
ATM access may be limited while traveling
May have fewer specialized accounts
Savings Accounts
It can be easy to look around for the best checking accounts when you’re planning on making a switch. But saving for the future is important, too. You might find a local bank has lower fees on checking, but a national bank offers better interest yields on its savings accounts. When the benefits outweigh the costs, it could affect your choice.
There are a few other things to consider in a savings account. Some have an initial deposit, while others require a sizable balance for their higher interest rates. Furthermore, consider how often you’ll need to withdraw funds from the account. Many savings accounts limit you to six fee-free withdrawals and transfers per statement cycle under Regulation D.
Other Products and Services
Although checking accounts and savings accounts are top priority with a bank account, there are some other things to consider. You may find the best banks serve as a one-stop shop for all your lending needs, from money market accounts to CDs to mortgage loans. You may instead be someone who prefers to bank with multiple lenders.
It’s also important to look at the payment features your bank offers. Your bank account will likely come with a debit card. Can you earn rewards for using it? If your Illinois bank has credit card options, check for perks, rewards, and APR with those as well. Some financial institutions offer bonuses for new accounts or credit card sign-ups, and that can be another way to cut costs with a new bank.