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Financial advisers and bloggers talk about the importance of having an emergency fund and investing money. But what if you have no money? That’s actually the situation with many millions of households across America. In fact, a study conducted in 2011 found that nearly two-thirds of US households have less than $1,000 in liquid savings.
Are you one of them?
Don’t fret about it – do something about it! That something is building your basic grubstake – that money that will enable you to both build an emergency fund in the Foundation Phase and create a budding investment portfolio in the Accumulating Wealth Phase.
There are a whole lot of reasons why so many people have so little savings. We can hash out the details, but the better approach is to go forward from where we are.
There are two basic ways to begin building savings: cutting living costs and generating new income sources. Ideally, you’ll use a combination both, that way neither will be too painful.
Cutting Living Costs
Cutting living costs is a critical component of saving money, and it’s something you’ll do in the Foundation Phase when you’re creating a budget. Here are just a few reasons saving money by cutting costs is important:
- It teaches you to live beneath your means, and that’s the most fundamental aspect of being able save money at all.
- It can lower or even eliminate reliance on finding additional income sources, and the work that involves.
- There are no income tax consequences to cutting living costs.
With that being said, what are some practical ways to cut costs?
1. Eliminate seldom used services.
Most of us have services that we hardly ever use. It could be the cable TV that you hardly have time to watch, or a landline telephone you seldom use. It could also be club memberships that you never frequent. Review all of your expenses, and separate out those services you don’t really use. Eliminate them.
2. Make a temporary – but radical – reduction in your grocery budget.
Most of us shop by habit, and that especially includes groceries. But it is surprising how little food you can actually live on.
For example, you can decide to go without meat for an entire month, and make up the difference with less expensive alternatives like pasta, potatoes, beans and rice. All kinds of similar exchanges that can be made. There may – or may not – be health risks to making a radical change in diet. But you probably can pull this off for a couple of months. And you may be able to cut your grocery bill in half – banking the difference.
3. Cut expenses by a percentage across the board.
This is a way of cutting costs without hitting any specific expense too heavily. You can simply decide to cut your budget by a certain percentage rate across the board.
For example, if you decide to cut your budget by 10%, you may find there are certain expenses that can’t be cut at all, while others can be cut by 20% or more. The overall total is more important than specific categories.
4. Sell possessions that have debt attached to them.
This is one of the very best ways to cut expenses on a permanent basis. If you have a boat or a third car that has a loan on it, sell it and use the proceeds to pay off the loan. That will eliminate an ongoing monthly expense.
Bonus: Any money you receive over and above the loan balance can immediately be directed into liquid savings.
Whatever cost-cutting measures you use, be sure that any savings are directed specifically into your savings account. The idea here is to build up savings, not to find other ways to spend money.
Generating New Income Sources
Cutting costs is always the first, best place to start raising money for savings. However, it’s limited by the fact that you can only save so much money. Generating new income sources, on the other hand, increases your household income, providing even more money to shovel into savings.
During the Foundation Phase, it’ll help you to find new income sources – but don’t confuse this with the Strategic Income Phase. The Strategic Income Phase is the point at which you’re ready to start appropriately spending your retirement assets, trying to preserve retirement assets to last you the rest of your life, and preparing your final financial plan.
Try some of these ways to generate new income sources so that you can better work through the Foundation Phase . . . .
1. Sell anything you no longer use.
If you have it, and you don’t use it, sell it – it’s that simple. Even if you think it’s trash, someone else may still pay money for it.
Clean out your basement, garage, closets, toolshed, and that room that exists in every house that seems to do little more than collect stuff, clean up whatever you find and get it ready for sale. Have a garage sale, or sell on eBay.com or Craigslist.com. You can raise hundreds of dollars – maybe even thousands – by doing this. And you should do it at least once or twice each year.
2. Find more stuff to sell.
I like garage sales. I know it’s a cliché, but it really is amazing the stuff people are looking to get rid of. You can literally buy good stuff for pennies on the dollar. And some if it you can even sell to raise money. If you have nose for a bargain, this is a way to raise easy cash. You can buy at garage sales, and sell the good stuff on Craigslist for cash.
3. Participate in bonuses at work.
Many employers offer bonuses for various employee efforts. One of the best is new customer bonuses. If you know of anyone who might do business with your company, put on your salesperson’s hat and get them connected with the right people in your company. If your company has an employee referral program, start referring. This will earn you money just for passing on information.
4. Rent out a room or space in your garage or basement.
If you have an extra bedroom in your house, consider a short-term rental to a friend or family member – if your community and neighborhood will permit it. If you have extra storage space in your basement, you might be able rent it out to someone who doesn’t have enough (just make sure it’s not hazardous material). If you have an extra space in your garage, consider allowing someone else to park a vehicle there for a fee. It’s easy money.
5. Take on some side work.
You have skills. Put them to use! Can you cut lawns? Shovel snow? Paint a few rooms? Tutor a student or two? Help someone with computer problems? Any skills you have could be turned into an extra income.
Many people are turned off by the idea of making an effort to generate new income sources. But as you can see, most of these are pretty easy. And some – like renting out space in your home – are completely passive in nature.
More important, you don’t have to make a lifetime out of generating additional income sources, unless of course you want to. You only need to keep it going long enough to build up enough savings to get yourself going.
When done in combination with cutting living costs, generating new income sources can be a powerful way to build up savings quickly. You may find that you are able to both fund an emergency fund and begin an investment portfolio in just a few short months.
What’s really important is that you get that basic grubstake together as soon as possible. Once you start, then saving money will be easier – you’ll know just what you need to do. Then you can build on what you have, and start that journey on the road to financial independence.
What are you needing to save money for? How will you do so? Leave a comment!