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Published since 1990, Sound Mind Investing is America's premier Christian financial newsletter. Learn more about Christian investing and finances at the SMI Web site.
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Finance
To Build Up Savings, Pay Yourself First!
CBN.com – Years ago, when one of my college-age sons came to me for help in getting his finances organized, the first thing I did was get him set up on a pay-as-you-go basis using the "envelope" system. That's where you cash your paycheck(s) and immediately divide your income into several envelopes, one for each of your major spending areas. When the money in a particular envelope is gone, that means no more spending in that area until the next payday. (Modern technology has enabled us to improve on this approach -- now we use the "Ziploc™ bag system" so all the loose change doesn't fall out!)
Here's the process my son used as he worked on building his emergency-savings fund. After setting aside his tithe and taxes, what was left was his spendable income. This was the "pie" that he proceeded to "cut" several ways. The first piece of 10% went into his emergency-savings account. Then, the remainder of his spendable income went into envelopes for paying his current bills, debt repayment, and monthly living expenses.
His emergency fund came in handy twice during his first few months using the system — to pay for emergency brake and transmission repairs. The money in the savings account was used up, and he had to begin building it anew. But having it on hand prevented him from going back into debt to pay for those items. That's why it makes sense to set aside savings in a contingency fund.
When it comes to saving, despite your best intentions, it's easy to rationalize putting it off until the next paycheck. Too many times, the "savings" envelope (or account) goes unfilled. One way to overcome this is to have some of your money put aside automatically before you have the opportunity to spend it. Here are two paths to automated savings:
• Sign up to have part of your paycheck (you decide how much) automatically deposited into your savings account at your credit union or local bank. It's easy, convenient, and offers some useful discipline. Plus, your savings are insured and available for withdrawal without penalty whenever you wish.
• For a higher rate of return, set up automatic transfers from your checking account to a money market account at an online bank, such as ING Direct, Ally, or EverBank.
How much should you save? Consider a strategy of saving 5%–10% of your gross income when you're in your 20s. Initially, this will go toward building your emergency fund. Once that's in place, your savings can be targeted for a down payment on a house and other large purchases. (Eventually, the primary use of your savings will be to invest for retirement.) Then, move up to 10%–15% in your 30s and 40s.
Many couples believe they could never save that high a percentage of their income. But let me ask you — what would happen if a cutback at work resulted in fewer hours and a 10% reduction in your income? Wouldn't you make the necessary adjustments in your spending so that you could still cover the basics? Unpleasant though it might be, you would.
In the same way, saving 10% of income or more is not beyond the financial capabilities of most families. Usually, it's a matter of having the willingness to sacrifice and make the necessary changes in one's lifestyle.
Sound Mind Investing exists to help individuals understand and apply biblically-based principles for making spending and investing decisions in order that their future financial security would be strengthened, and their giving to worldwide missionary efforts for the cause of Christ would accelerate. In other words, we want to help you have more so that you can give more.
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