Now that we've reviewed effective strategies for paying off debt, it is time to turn our attention to a much more fun topic, saving money!
While my goal has been to go backpacking around the world, the amount of money I've been saving over the past five years is easily enough to buy a condo in a nice neighborhood in Washington, DC or a Porsche. For these techniques to work, I am assuming you are as passionate about your goal as I am about mine.
1. Maintain your current standard of living. Adopt a mantra akin to ” I want what I have, and don't want what I don't have.”? In my case, as my income rose over the past few years due to raises, cost of living adjustments, and a promotion, I simply saw the added income as a way to save more money toward my goal, rather than upgrade my car (Audi A4 please) or buy a new watch (Tag Heuer). This approach may not work if you are impatient, or have little time to achieve your financial goal.
2. Downgrade your living situation. This tip is for those of you who cannot maintain your current living arrangement while working toward your goal. If you're living alone, perhaps it's time to find a roommate, move in with a friend, or (gasp) back home with your parents. Personally, I'm the type of person who is much happier living alone after years of experience with roommates (who were often friends mind you). Technically, I considered my move from living with a roommate to a studio apartment an upgrade; however I locked in an amazing deal on the terms of my lease as a result of good timing. My initial rent began at about $250 less than the normal rate for my apartment. My yearly increases were 7%, thus I saw the benefit of my initial rate pay off over 4 of my 5 years in the apartment. By this last lease renewal (for 9 months), the rate caught up with me due to the real estate growth in my neighborhood, however I still negotiated them down from their initial renewal rate! If you can't bring yourself to downgrade, then commit to technique number one by not upgrading.
3. Sign up for automatic paycheck deferrals, or an Employee Stock Purchase Plan (ESPP). I've worked for two start-up companies, earning stock options with both. Neither situation afforded me an early retirement when the company went public or was bought. I did learn the value of ESPP's though. In both cases, I was able to defer a percentage of my post-tax salary to buy the parent company stock at a 15% discount off of the lowest price within a financial quarter (three month period). The current participation in my company's ESPP plan will account for about 35% (or $10,000) of my total trip savings. The reason I prefer this approach over deferring money every paycheck to be deposited in a savings account is that I have the potential to earn at least a 15% return on my investment. Luckily, my company has been doing well, so it will be more than that when all is said and done. If you do not have access to an ESPP, then definitely sign up for a percentage of your salary to be deferred into a high-interest savings account (such as ING Direct) each pay period. Increase the deferral percentage periodically, or whenever you receive a pay increase. This technique is extremely effective because you save the money before you are tempted to spend it!
4. Sell your car, or live closer to work. I couldn't bring myself to sell my car, the driving culture is too ingrained in me. I did ensure that I lived close to my job though. I currently live 8 miles away. This reflects a desire to save money, as well as time (long commutes are draining). I can go two weeks on one tank of gas in my VW Jetta. Given the increasingly high cost of gas, this should be a no-brainer. Getting rid of a car altogether can save you on loan interest, insurance, maintenance, gas, parking, and car washes. Plus, using mass transit, a bicycle, or walking are all better for the environment. If you need to buy a car (such was the case when I totaled my first VW in 2005), go pre-owned (aka ” used”?). You immediately avoid the instant depreciation that occurs with a new car, and reinforce the importance of your goal over a new automobile (which really boils down to a status symbol, right?).
5. Be conservative on your taxes. My suggestion here is to pay the government a little more than you may owe at the end of the year. By doing so, you will ensure a refund once you file your taxes, versus potentially owing money. I made this switch for the 2006 year, and was much happier to receive a $600 refund than having to pay as I did in previous years. The counter argument here is that the government will not pay you interest on that money. Using my 2006 refund as an example, even with 5% interest, I'd only be earning $30 off the extra money paid in taxes. Considering this would account for 0.001% of my total financial goal, I'm not too concerned. Plus, I'm setting myself up for a refund for the 2007 year, which I will receive once I've already quit my job and am on the road in 2008.
Bonus Savings Tip
Drive defensively. In my early 20's, I received four speeding tickets within 13 months. My car insurance doubled from $900/year to $1,800/year. It took me three years of slower driving, and no additional tickets, for my insurance rate to noticeably decrease. Careful readers may note my mention of an auto accident under tip number four. It was my fault, however I was shocked to find out that Progressive didn't raise my rate because it was my first accident.
Next week I will touch upon some smaller, day-to-day ways to save money.
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