While most people recognize the importance of saving money or increasing our current incomes, some of us need more than logical motivation to get the job done. If that describes you, then you should take advantage of the following money tricks that make it easier to build a bit of a nest egg and/or to live the life you want.
Money Hack #1: Use Automatic Savings
Have you ever noticed that no matter how much money you have, you seem to be able to spend it?
Back when you had a smaller income than you do now, you probably struggled but made it. Now that there’s more money, you still find that you’re living just within your means. For some reason, we look at the amount we have available and base our decisions on that. If we see a larger balance as a result of better pay, we somehow manage to use it up, usually before we ever get to the important act of saving.
Automatic savings can seriously help with this situation.
In just one quick conversation with your bank or credit union (or sometimes your employer), you can set up a system where they automatically deduct a certain amount of your paycheck and place it into a savings plan.
When you see your account balance on payday, it already reflects this process. So, if you get paid $1,500, but have an automatic savings plan that puts aside $50 from each paycheck, you simply see a balance of $1,450. It doesn’t seem like there should be any difference between having the money automatically put into savings and doing it ourselves, but there is. In fact, most people report that they don’t even notice the “missing money.
Instead of trying to be “good” and transfer $50 to savings, this money trick simply allows us not to think about it at all and just go on with the month!
Money Hack #2: Harness the Power of Compound Interest
When people truly start to understand the power of compound interest, two things happen
One is that they get excited about the potential. The other is that they are disappointed that they didn’t start saving earlier.
Compound interest seems pretty complicated, but it simply means that the longer you save your money, the faster it can earn interest.
A common example is to use a 10% interest rate. This is more than banks and credit unions will offer, but isn’t too far-fetched when it comes to other types of long-term savings, such as mutual funds.
(Check out the Security and Exchange Commission’s website here for more information on the pros and cons of mutual funds.)
Interest that has been earned is added to the existing total at pre-determined intervals. Let’s say that you are earning 10% interest and it is compounded annually. That means that if you saved $1,000, at the end of the year, an extra $100 would be added in interest.
The following year, then interest would be calculated based on your new savings total of $1,100. So, that year, you would earn $110 in interest, bringing your balance up to $1,210. In year three, the interest would be calculated based on this total for an additional $121.
So, with an initial deposit of only $1,000, by the end of the third year, you now have $1,331. And it just keeps growing. At the end of ten years, you have $2,593 without having added a single cent to your original savings. Imagine what would happen if you continued to add $1,000 to that total every year, in addition to the interest!
Use an online interest calculator to really give yourself some perspective on the power of this money trick.
Money Hack #3: Find Your Money ‘Leaks‘
Perhaps surprisingly, most of us waste far more money than we would believe. “Wasting” can mean different things to different people, of course. For some, it may be spending money on other people instead of focusing on one’s self or family. For others, it’s buying things that aren’t necessary or even paying too much for items that could have been purchased for less.
The trick, though, is to actually identify the areas of waste, or the “money leaks.”
A very common first step in learning to budget is to start keeping a spending log. To do this, keep a notebook handy (or use an application on your phone) in order to track every single penny you spend for at least a week.
Whether it’s $40 for a tank of gas or $1 for a muffin from the school bake sale, write down every purchase. At the end of the experiment, you can track how you’re spending your money. The longer you do this, the more accurate reflection you’ll have.
This money trick works because nearly everyone who tries it discovers that there are places that the money just seems to leak.
Perhaps you’re paying for drive-through coffee every day, to the tune of about $20 a week. It may all of a sudden seem quite reasonable to get the coffee habit under control! This is such a common problem that someone actually created this coffee cost calculator to show you how much you could save.
Bonus Thought:
If you spend just $20 a week on a money leak, it may be helpful to realize that this adds up to $1,040 a year. Remember the compound interest money tip above? Cutting out the expensive coffee breaks now could add up to an extra $1,600 in interest alone!
Money Hack #4: Create Passive Income Doing Something You Love
When it comes to increasing your income with a traditional job, there are a limited number of choices. You can work more hours, get a raise, or find a different job that pays better.
While any of these might be a reasonable suggestion for someone who wants to improve their ability to save, there is another option that many people are using.
This money trick does take work, but the long-term rewards may very well be worth it for you.
Passive income is that which continues to come from something you did in the past or for doing minimal work in the present.
For example, if a writer gets royalties on a book that continues to sell for 20 years, he or she doesn’t have to keep writing the book over and over. Instead, the royalty checks are passive income.
There are many ways to develop passive income streams, although it is important to make sure that any approach you take is legitimate and not a scam.
In the pre-Internet days, a lot of people talked about passive income in terms of things like vending machines or candy machines. You purchase them once and hire someone to fill them up occasionally, but the amount of actual work on your part is minimal.
Other traditional types of passive income might include:
- Money collected from a rental property
- Pensions
- Dividends and interest
- Earnings as a “silent partner” in a business
The field of Internet marketing has opened up new possibilities for passive income, with many people earning respectable amounts from selling downloadable products (such as ebooks and reports) or as a result of procuring advertising on a popular blog or website. The key to this tends to be passion.
If the individual is simply trying to make money, it often doesn’t work. Instead, when he or she is creating products or solutions based on actual passion, passive income streams are much easier to create and maintain.
There is no arguing that it is important to save for the future or to increase your own income now, but it is equally obvious that it’s not always an easy thing to do. Using these four money tricks, the majority of employed people can, however, do exactly that!