We can’t begin to tell you how many times a client requests investment advice when they should be focusing on how to save & budget better. Maybe that happens because the second many of us get any money in our hands, we often think where should I spend it or where should I invest it. Unfortunately, this type of activity is acceptable in our culture — when was the last time you heard someone say, “Hey, I cut my credit card debt in half which is great because I’m paying 20% in interest.” We usually hear, “I bought some awesome speakers or I invested in this stock & it’s up 20%.”
So What Do We Suggest?
Plain & simply — Disciplined Saving/Budgeting. You will start to achieve this objective by first asking yourself these types of questions.
Do I have Any Debt?
If the answer if yes, you may want to then ask yourself what type of debt you have. If it is credit card debt, chances are you will want to pay that off as quickly as possible since the interest is usually at least 15%. If it is mortgage debt, well, you can probably live with that as long as you make your mortgage payments and are on a path to pay down your mortgage over time. The same logic applies to auto or student loans. The moral of the story, the more higher interest debt you pay down, the better off you will be in the future.
Can I Reduce My Grocery Bill?
Of course. The best way to start is to set a high level goal such as cutting 10% to 20% off your weekly grocery bill. If it’s $100 a week, try to get to $90 or $80. The easiest way to do this is by looking for coupons online or at stores. There are so many coupon sites online these days and you can often order your groceries and toiletries online at cheaper rates (coupons.com, couponcabin.com, couponmom.com, retailmenot.com, smartsource.com). If you are lucky enough to live near a discount grocery store such as Trader Joe’s then that can work as well.
Is There a Way to Cut My Energy Bill?
Yes, there is much better technology available today to improve your home’s energy efficiency. Energy star estimates that the average homeowner that insulates and seals their homes will be able to lower their annual heating & cooling costs by 20% which is equivalent to 10% of their total annual energy bill. There are also tax credits available for energy efficiency improvements.
Do I have an Emergency Fund?
If you don’t have at least 6 months worth of living expenses kept in a liquid (easily converted to cash) account somewhere, then you should seriously start thinking about doing this. You never know what unexpected surprises can happen in the future (i.e. unemployment, divorce, death in family, moving etc.). Save the money now so you are not forced to do something silly like liquidate your IRA early and have to the 10% penalty in addition to the ordinary tax.
Remember Saving is NOT the same as Investing
Believe it or not, many put investing in the same bucket as saving. By definition, saving means economizing or reducing the cost where there is no financial risk in doing so. Yes, with investing you can make a return on your investment but there is always downside risk that must be taken into account. For instance, if you figure out a way to reduce your weekly grocery bill by 20%, you will cut that cost. Whereas, if you invest money in the market with a goal of making 20%, that could happen but you could also lose 20%…so there’s risk involved.
