It sounds kind of silly, but not everyone knows how to save money correctly.
Sometimes it’s easy to figure out how to save money correctly. But other times, what seems like a good way to save money actually costs more money in the long-run. Let’s look at some examples.
Incorrect Saving Strategy #1: Credit Cards
It’s pretty clear that spending money on a credit card won’t save money. But sometimes people use the credit card to make money. However, in certain situations using credit cards to make money actually results in losing money.
The first example is using a credit card to get rewards. Whether they’re airline miles, gift cards or cash back, the best rewards are usually more costly if the credit card is not paid off in full each month. With a balance carrying over each month, the credit card holder will then pay interest, which can quickly exceed the rewards obtained.
Another example is where a user pays off the credit card each month, but the rewards then cause them to spend even more money. Let’s say you spent $3,000 one month and received 1 percent cash back. That’s $30 you can use to reduce the monthly balance to $2,970. But if the $30 reward doesn’t go to reducing the credit card bill, but instead pays for another purchase, then no savings took place at all.
Incorrect Savings Strategy #2: Poor Investment Choices
Saving money refers to not spending money. But how an individual uses the saved money can mean that saved money can grow or die. For instance, is the money put into a savings account? Given current interest rates, that money won’t grow much. However, the advantage is that the money is safe and guaranteed by the federal government. Alternatively, the money can move into a riskier investment, such as a stock portfolio. The advantage is that the money could grow rapidly and possibly double in a few months or years. The disadvantage is that the money could literally disappear if used to buy stocks that lose value. This can discourage even the most disciplined saver. So when saving money, an individual must make sure that the money is safe. Otherwise, no savings may actually occur.
Incorrect Saving Strategy #3: Saving Unreasonably
Most people need to spend at least a little bit of money for a want rather than a need. Very few people can save all their disposable income and not get discouraged. All the extra work and sacrifice of cutting back and not enjoying the fruits of the savings labor can dishearten anyone. If an individual saves too much money, they may eventually break and go on a spending binge, losing all the money they worked so hard to build up. Therefore, savers need to accept that they need to spend a little bit of money on themselves every once in a while. Of course, one exception to this rule is the person who actually enjoys the act of saving and seeing their bank account get bigger. But for most, seeing a dollar amount rise on a bank statement is not enough to compensate for never being able to buy certain things.
Incorrect Saving Strategy #4: Not Creating a Budget
To maximize a savings strategy, an individual should create a budget. Without a budget, the person has no way of identifying the best areas to save money or how effective their money-saving strategy is. For example, if you don’t know how much you spend each month or week on food, how can you determine how effective you are at saving money on food costs? The simple answer is that you can’t. Budgeting is essential to fully understand your spending habits.
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