What's the Right Way to Save?
We all have our own ways of handling our finances -- and that's why it's called "personal" finance. What works for one person may not necessarily work for someone else, and this is why I find it highly interesting when people get into debates over the different ways to manage money or handle debt. Is there really a right way and a wrong way to do things?
I will argue that there are many effective strategies to go about handling your money, even if some of these strategies may at first come across to you as being on opposing sides of the fence. Depending on one's circumstances, one approach may work better than another. Also, it's not unusual for your financial habits to change based on your particular situation or stage in life. You may find that a lifestyle adjustment may prompt a corresponding change in your financial plans.
So allow me to present some interesting arguments that govern the process of saving. There are many more debates of a similar nature to this that I've come across, but for now, I'll cover these five points on the subject of saving money. Do you find yourself belonging to one camp or another? I'll try my best to supply my own perspective on each question so you can see where I stand:
Is There A Right Way To Save?
1. To budget or not to budget, that is the question.
Do you budget? Budgeting is an important step to get your financial situation under control. If you are feeling the weight of a heavy debt load, then the first thing you've got to do is to track your income and outgo. Where is your money going? You can do this for free with a tool like Mint or Wesabe. Or you can go with a solid desktop tool like this one I've reviewed called YNAB, or any one in this list of budgeting tools. While some people meticulously record every single dime they've got and apply this to their budget, some perform a more cursory process and take a lighter approach to budgeting. I actually belong to the latter camp: I don't capture every cent that enters or leaves my clutches. I tend to have a rough idea of my expenses and do a monthly review based on the account statements that I have. I then enter these summaries into my budgeting tool. I'm comfortable doing things this way because I feel that I have solid control over my spending. Since most of my spending has been very predictable, I don't see why I need to track every item I buy from the grocery store or every dollar I spend on gas. I've been "cutting corners" this way for years, but I've noted that this hasn't had a negative impact on my budget in the least bit. But how about you -- how do you budget?
2. Pay yourself first or pay yourself last?
I am an advocate of the "pay it yourself first" approach -- that is, I've signed up for bill pay, direct deposit and an automatic savings program. Paying yourself first is a strategy that involves designating a portion of your income (say 10%) and moving it to a savings fund such as a high interest account, or to a longer term investment such as an index fund. But there are folks who evangelize the "pay yourself last" approach, which as I understand it, simply means that you save as a conscious "choice" rather than as an automatic process. I'm actually using both strategies to some extent -- I've set up an automatic savings program for a percentage of my income, then with whatever discretionary income that remains, I may save additional money based on choice. For more on "paying yourself last", check out Passion Saving.
3. Use credit cards to save or avoid them like the plague?
I've often declared how much I appreciate credit cards as a financial tool to help me with my finances. I've applied to various credit card rewards programs to help me save while I spend, and quite appreciate the cash back and points I earn when I use my rewards cards. Of course, for every person who agrees with me, there are countless others who will fervently disagree. And it all boils down to our past experiences with credit card debt. For those who have been heavily stung by their credit cards, it's not a surprise that they develop an aversion to cards as they work to control their debt. Is it possible for those who've had negative experiences with credit card debt to eventually develop a more favorable opinion of credit cards?
4. Pay down debt or build an emergency fund?
For some of us, aggressively paying down debt is a significant goal. I actually tend to fall in this camp as well, because I'm not one who likes to carry debt for long. But if you've been following Suze Orman, you may have encountered one of her more recent tips: if you don't have any savings, she encourages you to think about paying only the minimum on your credit cards and instead, channeling the rest of your money towards an emergency fund. The current credit crisis has prompted this new advice from Suze, who believes that we should focus on building our savings and relying on our own funds, now that card companies have become less supportive of their customers.
5. Pay down most expensive debt or smallest debt?
The quickest way (and therefore the cheapest way) to retire debt is to pay down those loans with the highest interest rates. I tend to address my debt this way, regardless of how large my loans are, but it may be easier for some people to stick to their debt reduction program by tackling smaller goals first. So picking the low lying fruit by first paying off those debts that are smallest in size (regardless of APR charges) may be the more encouraging option for some folks. Which method would you prefer to go?
Given all these points, I don't disagree with any one approach to managing money. I say: do whatever works for you, whatever's comfortable for you. What's important is that your chosen techniques help you make good progress towards your financial goals. What matters is how well your strategies work for your bottom line.
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