Stuff My Dad Says, the New Years Edition

I've reached that point in my life where I find myself quoting my parents.  I know...Teenage Me would have denied the possibility of this ever happening but...never say never!

As we start the New Year, financial goals are one of the popular New Year's Resolutions: savings, eliminating debt, planning for retirement.  They all involve setting and sticking to a budget. My father's advice on budgeting was this: Pay Yourself First.  As a college student, I really liked this advice and took it to heart. I ALWAYS paid myself first.  I made sure I bought my new boots, new purses and dinners out first and worried about the rest later.  You can imagine how that worked out for me: I ended up like many twenty-somethings with a big ol' nasty pile of debt. But, that's a story for another time. 

By paying yourself first, my father meant that you had to carve out what you wanted/needed to save FIRST.  Set your savings goals, then look at your required monthly expenses and see what you've got leftover.  I think that many folks to this in a different order: Take the income, subtract necessary expenses, subtract some "fun" money and then save what's left over at the end of the month.  Here's the problem...my "fun" money demands are limitless.  There was never anything leftover at the end of the month because there was always something I "needed." (Shoes and a new outfit for Saturday night were necessary, right? I mean, seriously, I have to be "properly" clothed.) I have changed my attitude and my first priority every month and every paycheck is to get the money earmarked for savings OUT of my checking account before I do anything else.

The trick for me was setting realistic savings goals. I'd LIKE to say that I saved a thousands of dollars a month from Day One. But that's not realistic.  Even though "Saving" is generally regarded as a good thing, putting too much away can cause problems. If you can't cover your expenses, you must dip into the savings account to cover the overage or you "float" the over-spending with credit cards the intention of paying it off next paycheck. Once you break the seal on that Savings account, it's waaaaay to easy to take a little "extra" to get through the month or to do it a second time.  Don't go down that path! And, seriously...you KNOW the credit card rarely got paid off at the next paycheck!

It's OK to start small.  There have been plenty of studies that explain why an all or nothing approach is ineffective. (Think about weight loss, exercise regiments, smoking cessation, etc.) If you start shaving off 50% of your income each month without some sensible goal setting and budget scrutiny, you will fail. But, DO START paying yourself first.  Anything is better than nothing.  Start with $20, $100, $5....whatever is comfortable.  Then as you examine your spending and budget, you can make incremental changes to increase your savings without feeling the pain.

I love adjusting the savings rates at pay raise time. For the last few years, the military has received small annual increases every January. It's not a lot, .5%, 1.x%, etc. Regardless of the amount, that is a fantastic time to increase your TSP percentage by just one point.  You won't notice a difference in your paycheck; the raise will off set the increase in your savings. And, really, does a 1% raise really make that big of a difference in your salary each month?  If your basic pay rate is $2000, 1% means you are getting an extra twenty bucks a month. I can't do a whole lot with an extra twenty bucks, but in a year that will be $240 in your savings account. When you do the increase again the next January, you still have $20 going to your savings account plus an additional 1% percent from that year's increase -- and extra $40.  So, you are now saving $60 a month or $720 a year with zero pain. No cutting your spending, you're maintaining your current spending* and  passing the pay raises directly to the savings account.  When bigger increases happen at promotion time or time in service anniversaries,  that's the time to make a bigger jump in the portions that you increase.  Give a hunk to the savings and keep a little for yourself. (Yes, it's OK to throw yourself a bone once in a while!)  It will feel like nothing in the beginning...but $20 does add up over time, both in the savings account and in the amount coming out of your paycheck.

I may cringe and laugh when I find myself quoting my parents, but I'm pretty sure my parents would cringe at the thought of this former Shopaholic dispensing financial advice and encouragement! 

PS: If you haven't started a TSP, now is a great time to get started.  And yes, 1% is totally acceptable! 

*A quick note: When I say "maintaining your current spending,"  I'm assuming you are not charging a couple hundred bucks (or more!) a month on to your credit card. If you are, stop it!  Go back to the drawing board on your budget and start making some tough decisions to make ends meet.   Credit Cards completely negate the point of savings.