Saving Money Advice

Money Saving Advice - by Shopping for Deals

This tool is about a different definition of savings. Here we are talking about savings as in “not spending”. Also this tool is different in another way. It is not one that you can buy. It is in your own head and it is a major component of “Financial Therapy”.


It is a skill that you develop where you make forward looking financial projections of the consequences of decisions made in the present. Every decision you make has consequences. This is a framework for making financial decisions with long term positive repercussions within your family finances. Following the consequences of the kinds of transactions that you will make in your life should help to clarify how this tool works.


For a big purchase

We can start using a discussion of the largest purchase you will make in your life, your home. Thousands and tens of thousands of dollars of your take home income are up for grabs depending on how you construct the purchase of your home. The first opportunity for savings is on the purchase price. If you pay less for your house than you would historically, the first grab is the initial savings. You can do this by buying a fixer upper, a finisher offer or by buying a house when the market is depressed and no one else is buying…the old buy sun hats in January. This savings if compounded by the fact that you have thousands less on your mortgage that you will pay interest on. If you are buying in depressed market conditions you may also have the added bonus that interest rates will be low. If you lock in the low interest rates you will save money for years to come as interest rates go down but they also go up…and they will.

This is illustrated in your budget. Your housing costs will be less than if you paid a higher price for your home and paid higher interest rates. That allows you to have money to pay cash for the things you want in life rather than charge them up on credit cards. It allows you to contribute to your savings accounts so that you will pay cash for big items and make larger deposits to your retirement account.

The savings also compound if you buy a fixer upper or finisher offer. Again you pay less so you pay less mortgage interest. That allows you to save up to pay for a renovation. You can pay cash for it and you have the added bonus that you can make the house into exactly what you want. You can have it designed so that it fits with the rest of your life goals.

Then you don’t have to move and this is a huge savings. Every time you move you pay for agent fees, legal fees and moving costs. These folks get paid first and their payment is dispersed from your home equity and it is usually in the tens of thousands of dollars. This comes right off of your net worth. Your home is an asset where appreciation is compounded. When it increases the percentage of increase that they use is compared to the previous year. Does this sound like how compound interest works? So if you give up $5000 in equity when you move, that is worth 16,931.77 of equity in 25 years if the market goes up by an average of 5% per year.

As you pay your mortgage you will notice that every month you pay a little more off of the principal and a little less interest. This means that you are double ending your savings on your house. You paid less so you are paying less interest but you are also paying more off of the principal faster, especially if you use some of the left over budget room to pay lump sum payments on your mortgage. When you pay a lump sum, which is hundreds or thousands of dollars that you will not pay interest on for the rest of the mortgage amortization period. You monthly addition to your net worth compounds.

For a medium sized purchase

A car is a good example for a medium sized purchase. The first facet of car buying is that it is rarely about the money. Successful car salesmen have accepted that selling cars is all about the color. So for most folks this is a great opportunity to find money in their budgets and balance sheets. It is interesting that I have just been through this exercise with one of my children the last couple of weeks.

Like homes, buying the car when it is not popular to buy cars is a good time to capture some savings that will compound. In the summer and fall of 2009 car companies, the government and the banks are falling all over themselves to get folks to buy a new car. For those lucky enough to be in the financial position and need a car at this time, this is an opportunity to compound these savings for a decade or more.

First you save on the price. For new cars the price is low and the financing rates are 0% or almost 0%. The savings compound like they do when you lock in low home finance rates. With a new car you have the added savings that the new models should give you a substantial savings on gas because they get better mileage. The warrantees are awesome and you save because you minimize and control your vehicle maintenance costs. You don’t get any budget contingencies that set your financial plan back for weeks or months at a time.

You can go to the used car market and pick up incredible bargains. At this time there is little demand so sellers are motivated. You can save 30, 50 or even 70 percent on used cars. If you don’t then you can walk away to find a deal where you will save at this level. You can pay cash and budget the same amount as a car payment for maintenance contingencies, a new car in the future or other savings that can be compounded.

The dark side of car purchases is that cars are a depreciating asset. To make the best of this depends on how you use your car. A lease may work if you drive a lot and if you use your car for business. For private purchases, the lease alternative is a dog. If you are take care of your vehicles keep them until a new car has a similar cost impact on your budget. That is when buying a new car cost the same as gas and maintenance on your old car.

In all of the cases addressed above car maintenance costs are an issue. There is an added issue that it uses up time in your busy schedule that could be used to make money. That income and the fact that it could be compounding in some saving instrument should be included in any analysis of car costs.

For small purchases

100 small purchases add up to a medium sized purchase. 10 medium sized purchases add up to a large purchase. That means that if you apply the same analysis to your small purchases there is potential savings equivalent to what you can save by diligently making a big purchase like your home. You have to look at the timing of the purchase. Do you need it now or can you get it when the price will be more favorable? Will the balance of the purchase sit on a credit card costing 19% for months or years? Especially at 19% mistakes can eat into your budget surplus or add quickly to a shortfall. This is the trenches of personal finance management and you have to win the battle of the trenches.

Conclusion

Making bad deals is like swimming against the current. Stop making bad deals. It’s like stick man on the front page. It feels really good when you stop hitting your head against the wall. Savings compounded is as important a tool as compound interest on your savings. Make good deals that allow both of these tools to work within your budget and your balance sheet. It is like putting a turbo charger on an engine.

Questions? Financial Therapist Contact Ask us - We will reply and if it is a really good one we will publish it and its answer in our weekly blog entry. If a lot of folks have the same question we will build an FAQ url or urls on the site.

Back to: Personal Finance Budgeting