Pimp Your Finances

It’s barely a month into the new year, and I’ve already accomplished one of my New Year’s resolutions: start an emergency savings fund.

Here’s how I did it.  First, I started small.  For a long time, I didn’t think I had any money to put away.  I wanted to save six months of expenses, but never set aside the first dollar.  That had to change.

I had to start somewhere, so I decided to put away $25 from each paycheck.  Then I immediately decided to do $30 instead.  Another $5 won’t hurt, right?

It’s a tip I picked up from Suze Orman’s new book.  Whenever you commit money to saving/investing/paying down debt, take your initial payment, and add another 25%.  It’s a great way to kick start your goal.

I had a good start, but $30 isn’t that much.  So I’m going to increase my savings by 10% each week.  Next paycheck, I’ll set aside $33.  The week after that, it’ll be $37. The time after that? $41.

I’m going to take advantage of compound interest to trick myself into saving more. Each paycheck, I’ll save a few dollars dollars more, so it’s a painless transition.  But the amount I’m saving increases rapidly.

After six months, I’ll be saving $104 from each check, but the amount will only increase by $9 each time.  Very manageable.

After a year, I’ll be putting away a very healthy $354 from each check.  It’ll be an extra $30 each time, so the amount is bigger, but it’s still doable.

If I stick to my plan, I’ll have $3602 in my emergency savings account at the end of the year. 

I believe this plan will work, because it is sustainable.  It starts small, and relies on gradual changes.  It’s not reasonable to make a drastic change and expect it to stick.  That’s why crash diets inevitably fail.

To further increase the chances of my success, there are three steps I’m going to take.

1. I’m keeping my savings at a different bank than my checking account.  That way, it’s harder to spend the money, and I’m forced to wait 10 days before I can do anything with it.  The great thing is that by the time the 10 days are up, I’ve forgotten that I had the money, so I’m not tempted to spend it.
2. I’m paying myself first.  Each time I get paid, the first thing I do is transfer money to my savings account.  That way, I don’t have a chance to use it.
3. I’m paying myself last too.  I budget for all of my expenses, and whenever something costs less than I anticipated, I put the extra money in savings.  Same goes for the money I have in my checking account when I get paid.  I essentially zero out my account before every paycheck.

I’ve been meaning to start an emergency savings fund for a while, and the crappy economy gave me the swift kick I needed to actually do it.  By following the tricks I’ve outlined above, I’m convinced this will be a lasting habit.

Do you have any tricks you use to save/invest?