WRITER: SIMON GIANNAKIS

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Intended Audience
For those of you struggling to save anything from your bi-weekly pay cheques.

Summary Points to Take Away
(1) Can't spend what you don't have; thus, automatic saving routine prevents overspending, remember to pay yourself first.

(2) Don't think a higher income later will let you save more; higher income usually leads to higher expenses; thus, no trickle effect down to your savings account.

(3) Even with a home mortgage to pay off, don't adjust your automatic savings rate, instead adjust your expenses.

(4) With automatic contributions into a mutual fund, the saver can take advantage of average cost.

(5) Can't take advantage of investment opportunities without savings.

Analysis
Overall theme of this article is to pay yourself first, not your local cell phone or cable company, not the car dealership you bought your car from. Pay yourself first.

Conventional savings method has been to try and control your spending and whatever's left will be saved. Issue with this is most people can't accurately forecast their expenses, usually resulting in very little being left over at the end. Is there a better way? Try paying the most important person in your life first, yourself! Go against conventional methods, identify an amount of your paycheck you wish to save (say 15%) and then have that money come out of your bank account so it can't be spent. This way if you budget your expenses incorrectly, you'll have to limit your spending, not your savings. Most think the'll save more in the future with an expected higher income, problem is this never turns out to be the case as people adjust their spending habits to match changes in there income (ex. If you received a 10% raise, you would start purchasing more expensive foods, clothes etc, warranting it to yourself through the fact you received a raise); thus, resulting in none of the additional income being earned every finding its way to your savings account. Using an automtical savings approach, this natural human tendency can work for you, with less left to spend we automatically adjust our spending to weed out those highly discretionary items that weren't needed in the first place.

This plan works even with those who have car, student or home loan/mortgage, since those loan payments should be considered part of the amount available for expenses your savings shouldn't suffer as a result from it. So if you want a home, you'll have to cut down on your personal expenses, not save less.

Ultimately your biggest enemy is yourself, so keep yourself in check by taking away spare cash before it can be spent, remember you can't spend what isn't there (assuming you can stay away from credit cards). This is typically a big separating point between the poor and rich, the rich keep enough away to take advantage of financial opportunities that arise, while the poor don't have the ability to take advantage of these opportunities.

Additional benefit for automatic savers is if those savings are going to a mutual fund account, you can take advantage of average cost purchasing; thus, don't have to worry about market timing, etc. If you continuously keep saving the same amount week in and week out, your purchases will automatically balance out market swings with more units being purchased when the market is at a low point and less units when the market is at a high point. This automatically causes you to buy low and sell high so to speak.

Where to go from here?

Go to your local banking institution and set up a "pre-authorized withdrawal", which will come out of your general bank account into whatever savings agent you prefer (savings account, Mutual funds, etc). Set it up to come out weekly and don't adjust your savings rate, instead adjust your spending. Pay yourself first.

Would love to hear your feedback, contact thatstockguy.NET@gmail.com.

Thanks,

Simon

Simon Giannakis is the founder and creator of  www.thatstockguy.NET . He is a Senior Accountant within the Assurance and Advisory group at an international public accounting firm in Toronto, Ontario. Simon is a Chartered Accountant and currently pursuing his CFA designation. Simon can be contacted through thatstockguy.net@gmail.com .