There are no major secrets to a long term plan for financial stability and for saving for the future. Although the talk about interest rates, compound interest, account types and such is often frightening, the most solid plan consists of just three stages.
- Stage one – Debt repayment: Since interest charged on debt far exceeds the interest that is offered the quickest way to building savings is to get rid of debt as quickly as possible so this should be the number one goal. Total up the amount of debt, find out how long it will take to realistically clear it, and settle on a debt repayment plan. If you still have good credit but have a lot of debt, it can often be a viable choice to make a single consolidation loan to pay off all the other loans. Consolidation loans come at a far more favorable interest rate and are much easier to keep track of. Once debt is cleared then the budget can remain unaffected and savings can begin, by putting the same amount of money as you were using to pay off debt into savings.
- Stage Two – Building the future: Once all debt is repaid, many people are tempted to simply dismiss that part of their budget. The danger with this is that you may return to the same ways that encouraged debt in the first place. The best way to proceed when debt is finally paid off, is to continue putting exactly the same amount of money aside as was being used to repay debt, but to put it instead in a high interest savings account. This will not impact the existing family budget, as it will already be used to not making use of this amount since it was being taken in debt repayment; but often the same level of money that is used for debt repayment makes a suitable monthly amount to build a reasonably sized savings fund.
- Stage Three – Don’t touch! Although this might seem the most simple stage, for most people it’s often the most difficult. While a debt must be repaid or the consequences are dire, there is motivation to keep paying; but when there is no longer any debt, there is the temptation to ‘reward oneself’ by diving into any savings at the least opportunity. Any small crisis leads to a raiding of the savings account, and consequently the savings account never gets the chance to grow and prosper.
Sticking to this simple three point plan can take a family from a desperate debt situation to a savings account in the tens of thousands if not the hundreds of thousands of dollars. But another important thing to remember is that it won’t happen overnight. Saving takes time and perseverance; it will ultimately pay off, but it will also take years and even decades to do so.
There is also the temptation to siphon off money from the savings accounts for more risky investments, under the pretense that if the money is safe, then it’s an available resource that can be fallen back upon if a more risky investment fails to pay off. The danger grows if, initially, a more risky investment pays off, as it can draw more and more money that should have been sent to savings into funding the investment. A stock market crash wiping out the investment could thus end up wiping out most of the savings as well. If this is compounded by one partner in a relationship making the risky investment without the knowledge and agreement of the other – the relationship could be in big trouble.
Both partners in a relationship should be vigilant with the intention of helping the other partner. Family finances should not be a category that is used against one or the other partner, or for scoring points of the other. Fiscal discipline can be difficult, and a partner needs to be there to assist their spouse where problems develop. Communication is the key with this, as with so much else, which is why it is so important for any investments that are funded by the savings account to be by mutual agreement.
It is not difficult to grow savings. All that is required is discipline and patience. Avoiding taking risks, avoiding the temptation to stop saving, and letting the money grow until there is sufficient to do something memorable are the only requirements. With savings comes a lessening of the need for credit cards which are an expensive method of moving money around. Many card providers have equally flexible debit cards, and there is no more satisfying thing that knowing that the money you just spent on a card isn’t going to produce a huge bill at the end of the month.
