Saving money can be a very difficult task, if you don’t understand the right way to do it. With our society turning towards credit cards, financing for everything and online payments, it can be hard to keep track of your money. Using a cash system will help you save for retirement, college, large purchases and more. However, you need to complete a few other steps before you start saving and investing.
Small business owners struggle with saving because the type of income they make can vary quite a bit. This includes freelancers, independent contractors and those working for commissions or tips, as well. When it’s hard to plan your income, it can make it difficult to save. There are many ways to get a handle on your personal and business money.
A cash system can help you with your savings, but you need more than just a set of envelopes labeled with all of the things you need to pay or save for monthly. Setting up your envelope system can certainly help and you can use this type of system to separate your income properly. Using an envelope system for your business or personal finances will give you more control and will force you to use cash.
The Steps to Proper Savings and a Debt-Free Life/Business
You can apply the following steps to either your personal financial situation or your business. It’s recommended that you apply these steps to both, as they will give you the ability to put your financial house in order for both the personal and business sides of your life. The only difference, with a business, you will need to save cash reserves and within your personal finances, this is called an emergency fund.
Step #1 – A Small Emergency Fund
The first step is the same for both business and personal finances. Start by saving $1,000 and put in a separate account. You don’t want to try to maximize the interest you earn on this money. It’s not an investment, but insurance against emergencies. For a business, this is your cash reserves and you may need to increase the amount, depending on what you do for a living.
Your emergency fund helps to protect against “budget busters”. There’s nothing more frustrating than setting up a budget for the month, following it perfectly and then, halfway through the month an unexpected expense throws you completely off your budget. With an emergency fund, you won’t need to worry about any of the normal “budget busters”, such as car repairs and unexpected medical expenses.
Step #2 – Pay off all your Debts, Except the House
After you complete the first step, you need to pay off every penny you owe, except your mortgage. This might be very hard to do, but paying off all your debts will make your life easier. Living with debts hanging over your head, especially unsecured debts and student loans will cause stress. The number one reason couples divorce is money and by living a debt-free life, you will eliminate most of the money fights.
Start by attacking your smallest debt first, while paying minimum payments on everything else. Once it’s paid off, add the amount you paid on the first debt to the second on. By doing this, you can go through your debts from smallest to largest gaining momentum along the way. Once you pay off the final debt, you will free up a large monthly amount of income for savings and retirement.
Step #3 – Fully Funded Emergency Fund
Once you are debt-free, except the mortgage, you need to build your emergency fund. This will vary from person to person and business to business. It should be equal to at least 3 months of expenses and can be as much as a full year of expenses. The more you put into this fund, the better protected you will be from the unexpected expenses of life.
Step #4 – Investing for Retirement
After all your debts are paid, except the mortgage, and you’ve fully funded your emergency fund, it’s time to invest for retirement. By using a 401K, IRA or another type of long-term investment, you can start accumulating wealth. Invest 15% of your take home pay and make sure you seek out professional investing advice. Choose a trusted advisor in your area to help invest your money.
Step #5 – Payoff the Mortgage
While investing for retirement, you still need to work on paying off your mortgage. Tackle this with as much extra money as you possibly can and get it paid off as soon as possible. Owning your home or your business property, free and clear, will free up even more money for saving and investing each month.
Step #6 – Save for College
If you have children or plan to have children in the future, you want to start investing for their future. Once you’ve paid your home or business mortgage off, you need to sit down with your financial advisor and figure out how much to invest for college. This could vary depending on the ages of your children and the amount of income you bring in. Making sure your children don’t have to take out loans to pay for college will help give them a great start to their adult life.
The combination of an envelope system forcing you to use cash and these six steps, can lead you to financial freedom. It won’t be an easy journey and you will stumble along the way, but with the right resources, you can certainly live a better life with a peace you’ve never experienced before.
photo credit: flickr Little Li