Episode 5b Saving Money--Why and How

 I’m Feroz Bashari.  Today, let me tell you about some ways to save up your wealth.

 

[Main Points:]

I’m going to tell you about how some people live from paycheck to paycheck, always having to worry if they will have enough money.  Other people wisely set aside money for the future because unexpected expenses come up.

We’ll talk about paying yourself first.  This means putting money in savings before you start paying all of your bills.

We’ll look at how saving at work can be made easier through what’s called a 401K.  Employers will sometimes match what you put in.  That is, some companies will put in an extra contribution equal to what you have saved.

Finally, we’ll talk about how money can actually grow over time, especially if you set it aside and leave it to be reinvested.

Why Save Your Money at All?

Why is it important to save money?  Some people live from paycheck to paycheck, but other people prudently set aside money for the future because they plan on a big purchase such as a house or realize that unexpected expenses come up in life. They also save for their children’s college expenses, to help take care of their elderly parents, or for their own old age.  Financially smart people tend to budget their money, save it, and invest it. And they can still end up with a comfortable lifestyle. 

Almost all financial advisors agree that it is important to have six months of living expenses set aside in case of an emergency, such as losing one’s job.  After that much is saved, you may need to add other types of investments.   But all you need to know right now is to aim at saving six months’ salary.  Once you reach that point you might need to talk to a financial advisor.

There is a saying in investing that you need to “pay yourself first.”  What does that mean? It means that everybody seems to want some of your paycheck from you. And you're going to have to give it to them--for taxes, your apartment, for groceries, for a car. They all have their hands out. But pay yourself first. Put money in your own savings account and then pay your bills. If you don’t save money first, then you are likely to find that there is nothing left to save at the end of the month.

What are the unexpected expenses that can occur? It could be a car repair that has to be done in order for you to get to work. Or it could be having to pay for some or all of your medical care after a serious illness.  Taking care of an aging parent is not unexpected but it is an extra expense that may occur.  If you are off work for a long period of time due to illness, your company might or might not have a disability insurance to help you pay your bills.  But it will not pay for everything; you will still need savings. 

Another reason to save money is more psychological.  It can give you a feeling of security.  For some people it reduces their anxiety to know that they have the money for living expenses if they were to lose their job.  In fact, many advisors recommend that a person have six months of living expenses saved up in the bank.  The idea of saving money versus buying things for family members can be a dilemma for many fathers and mothers.  It can particularly be a difficult decision if there are family members back in Afghanistan who need help.

Americans also save money because they want a better future.  Financial advisors teach them about compounding interest.  Without going into technical issues, it means that saving $100 a month for 30 years would result in $57,333 in the end.  Because of interest on savings, a person ends up with more than they put in.  Compounding interest means that you get interest on what you put in but also interest on the interest.  If an 18 year old started putting aside $100 every month after graduating from high school, he or she could easily have $131,000 by the age of 65.  Saving money means keeping your eye on a future goal, whether it is a house, college for your children, or a comfortable retirement.

Setting aside money every month.  By saving every month you get used to a particular amount of money being available to you.  Some persons find it to be more painless when the saving is done automatically for them. You can set up an automatic withdrawal plan with your bank or credit union.  Another option is to have your employer do it. In America many companies have what are called 401K plans.  Sometimes, employers will match the amount of money that you put into such a plan.  Money in a 401K generally cannot be withdrawn until a certain retirement age is reached. However, you do not have to pay taxes on the money in the year that you make it--only when you withdraw the money.  So to summarize, it may feel more painless for your employer to save it for you; the employer may match it; and you don’t have to pay taxes on it that year.  Many company plans are structured to take out 3% of your earnings and put it into savings.  However, you can actually have them take out even more.  Even if your employer does not add additional money, it is still to your advantage because the money grows tax free.  Once you put money into a 401K, try to stay with the company until you are “vested,” usually 3-5 years.  If you withdraw your money before you are vested, the company can take back some of what they added to your account.  After you are vested, everything the company added is yours.

Money saving tips.  Compared to many countries the U.S. can be an expensive place to live.  This is especially true in times of inflation.  Therefore, it is very helpful to learn ways to cut down on expenses. 

One good place to cut down on expenses is groceries. The cost of feeding two parents and five children can be around $1,823 every month!  For two parents and ten children, it can be $2300!  With costs so high, making good or bad decisions could result in differences of hundreds of dollars every month. 

By what are called store or generic brands when possible. Generic brands may not have a name which is recognizable to you, and the label may not look as fancy. But generally generic brands for foods, medicines and other types of supplies are as good as the name brands that you see advertised on TV. This will save you money.

You can also buy in bulk (found at stores such as Sam’s and Costco) which makes your cost per ounce or per pound lower.

Buying frozen fruits and vegetables rather than fresh foods is less expensive and equally nutritious. Trying to combine several trips to different stores that are close together into one single trip can save money on gas.  Compare prices for items in different stores.  Some stores are known as discount stores and are good places to shop.  Sometimes a particular store will have the item you want marked down and on sale.  You may need to have some help from your sponsor to find sale ads and understand them.

Internet can be expensive, but depending on your family income, you might qualify for a free or low-cost internet connection.  Ask your sponsor, caseworker, or resettlement agency about that.

Instead of buying books, newspapers, or magazines try going to the library.  Librarians are often very eager to help you with your needs.  Most libraries have computers that are free to use so that you can get information over the internet.

Insurance is a major expense for most families.  Compare insurance plans and premiums to find the least expensive insurance for the best coverage.  And don’t get talked into getting more insurance than you need.

Think twice before buying an extended warranty on any item.  Most things you buy will have a warranty for the first year anyway, and new cars generally have a 3 year warranty.  There are times that it makes sense to purchase one.  An example would be if you plan to keep a car for a very long time.

Keep a close eye on automatic deductions from your bank account. Many people subscribe to Netflix, gym memberships, and other things, which they agree will be taken out every single month. By checking your bank statement, you may find that you're making monthly payments for something you are not even using.

Keep your debt levels low, and pay off your credit cards every month.  If your credit card debt and other debt is high, you could end up paying a lot every month just for interest which has built up.  We’ll talk more about this in another video.

When you buy an appliance, try to buy one that is energy efficient. An energy efficient appliance may cost a little bit more in the short run but can save you dollars in the long run.

Pack a sack lunch when you go to work. Even spending as little as $4 a day on buying lunch will cost you $1000 over a year.

Don't just have a checking account at the bank. Have a savings account too. A savings account will sometimes pay you more interest on your money. It will also discourage unnecessary spending by showing less money in your checking account.

The internet offers many more tips for saving money.  Don’t be afraid to ask Americans that you know for references and recommendations as to where to shop.  You can also ask about which professionals they use who are less expensive and have a good reputation.