Everybody needs a savings account. That doesn’t change if you live paycheck to paycheck -- in fact, it becomes even more important, because it means you have no way of paying major costs from your regular income. Saving money may not seem crucial today, but when you get into a car wreck and have no way to get to work, or when you suddenly have to get a root canal and a crown or else lose an entire tooth, your savings can make all the difference in the world.
When you live paycheck to paycheck, it seems all too easy to blow every cent on necessities such as food and rent. Saving money takes a concerted effort and a lot of self-discipline, because the need to build up savings doesn’t press on you like the need to eat. The only way to find money to set aside for savings is to pay your savings account first. Identify a realistic savings goal, then set aside that amount of money from every paycheck as soon as you get paid. Pretend this money doesn’t exist -- that your paycheck was smaller to begin with. Don’t spend it on anything else.
Don’t Spend It
Setting aside precious money from a puny paycheck isn’t the hardest part. The hardest part comes next: Don’t spend the money that you save. It does no good to spend your savings on things like the phone bill or a nice dinner. That money belongs to the future. Leave it alone to grow, so that it can someday serve a worthy purpose like paying for your children’s education, covering an unexpected hospital bill or providing for your retirement. For the time being, never spend money from your savings unless you face a true emergency.
Many people live paycheck to paycheck but have a decent quality of life. You may be able to improve your economic situation and grow your savings at the same time simply by being frugal and controlling your expenses. Don’t lose sight of the forest for the trees. Draw out a budget of everything you spend, and look for ways to save money without doing too much harm to your quality of life. Eat more cheaply. Spend less on recreation such as music and alcohol. Consider moving someplace cheaper. Give up your fancy phone. When it comes to making the painful sacrifices, remember that building a savings today can mean the difference between poverty later on in life when you won’t be able to work as hard as you do now.
Grow Your Money
Modern banks pay worthless interest rates on savings, meaning that with inflation, every dollar you save will begin to lose value as soon as you deposit it. To grow your money, you need to find something that can beat inflation. The simplest way is to invest your money in a mutual fund or a stock portfolio. Other possibilities include buying real estate or investing in commodities, but these more-expensive and difficult options lie well down the road. This strategy applies only to excess savings. For your emergency savings, strive to make sure you always have several thousand dollars in your savings account, enough to pay for a major emergency. Even if it sits there and loses money, it will still make a huge difference if that emergency comes along.
Josh Fredman is a freelance pen-for-hire and Web developer living in Seattle. He attended the University of Washington, studying engineering, and worked in logistics, health care and newspapers before deciding to go to work for himself.