Using discount codes and coupons may save a handful of dollars here and there, however this approach really won’t give you that long-term financial stability that you and your family require.
So let’s take a look at five key methods that, when combined, give you a far more holistic approach to personal finances.
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Be specific with savings goals
When you start your savings, be specific with the savings goal that you are working towards. For example, it is pretty easy to just say you are going to save $5,000 this year, however you also have to explain the how and what. A better approach would be saying you will eat out only once every month, so you can save $500 a month towards a big family holiday.
This way, you have clarity around what the money’s for, and also how you will get there. That means you are more likely to achieve that goal than being vague. The added benefit is that it also really helps you assess how realistic your goal is. Like if I said I would save $50,000 in a year, that works out to just under $1,000 a week, which is definitely not something I could achieve, unless I worked three jobs.
You should try to avoid putting anything on your credit card, if you can. Just as importantly, avoid debt for things that depreciate quickly. Say I bought a new car. As soon as I drive out the dealer’s lot, it has lost, let’s say 20% of the value. However, if I have a loan for it, I am still paying 100% of the costs.
There are times that borrowing money is unavoidable, and for the right purchases, it can actually make some sense. For example, education loans or business start-up costs, where you are investing in yourself, so you can actually earn more money later on. Say you start a managed IT services business with a $10,000 loan. If you pay that off and make $100,000, then you have earned 10 times the return. Also, low interest mortgages can be good debt, because houses typically go up in value, unlike the car I mentioned before.
Always remember to only borrow money that you are 100% confident that you can pay back on time, without extra penalties.
Invest for retirement
There’s an old saying that is don’t save for retirement, invest for retirement. Think about it some more, saving some money for retirement and leaving it in a normal savings account will not help you reach enough for your retirement goals. Investing, however, can help grow your money over decades. In 1975, if I put $2,000 in the bank, over time it would now be worth $2,000. In fact, the buying power of that two grand isn’t anywhere like what it was in 1975 either.
If I had put the same money into the stock market, it is very likely I would have over $200,000 now. Crazy! How can that money grow so fast? Well, number one, the value of shares have gone up significantly in the last 40 years. Add to that, compound interest which means that I could be earning interest on interest I already received.
Reduce your taxable income
No, I am not suggesting you should take a pay cut or work less. What I mean is that you need to find legal methods to pay less tax on the money that you do make. For example, many employers allow you to set aside part of your income for untaxed items, such as education, childcare, retirement funds and health care.
Another clever method to potentially reduce your taxes is to defer them. This means that you pay them later, by contributing to a 401(k) or traditional IRA for example. These types of retirement accounts allow you to defer paying taxes until you withdraw your money. Since you’ll do that during retirement, it may mean that your tax rate will be lower.
Invest in your home
You should always think of your family home as an investment, and apply the same principles. There is nothing better than living in a home that is slowly increasing in value, meaning you are literally getting paid to live there. You don’t get the rewards until you move, of course, but be smart about where you buy to live.
There are plenty of property investment websites and articles out there on building wealth through property investment. You should try to read as many of them as you can, and always consider your family home as yet another investment.
Thanks to the internet, there really is no shortage of personal finance advice available. However, not all of it is great. Make sure to read lots to make an informed decision, or speak to a professional for further advice, specific to your situation.
To summarise the above, when you are setting savings goals, you should be specific about how you will get there. Avoid high-interest debt and loans for items that will quickly lose value. Always invest for your retirement. Consider taking steps to help reduce your taxable income. Think of your family home as an investment property.