How to Save Money When You're Broke
Digging Out of the Hole You're in
How am I supposed to build up savings when I can barely pay my bills as it is? This is an excellent question, and one I asked myself a great deal during my 20s, when I was attending college full time and working full time in order simply to make ends meet. I absolutely hated a system in which I could work my hands to the bone and just never get ahead. Little did I realize back then that I really could have gotten ahead, but it's never too late to start saving. I am not a wealthy person now, but I have managed to aggressively pay off my mortgage (I'm over halfway done now and plan to have my house paid off within 2 years!) and actually set aside some money to invest in the process. Here are the three ways you can make saving money work on a shoestring budget.
Step One: Start With Cash
Getting started saving money can often be the toughest part of the process, and if you never get started, you'll never accomplish anything. That said, it's tough to just open a savings account and start putting money in there without first having a little bit of a nest egg. That's where cash comes in.
Cash is tangible. You can touch it, feel it, and even smell it. It's very, very real to me, and when I was paid for anything in cash, I would always spend a little time counting the cash I had, even if I knew how much it was. This wasn't some sort of perverse Scrooge McDuck fantasy, but rather me taking a few minutes to exercise mentally and to make the cash real to me. Once the cash is perceived as a real thing, you're ready to set some of it aside.
Try setting aside $20 a week, and even if you're paid with a check, go ahead and cash $20 of it so that you can do this pain-in-the-butt ritual. Going through the process is really important, because you'll need to make it not only a habit, but also a ritual. If you go through some sort of routine every time you have $20 to put away, you're much, much more likely to follow through with the routine. Try a tupperware container you can hide somewhere in your house with the cash in it, and every time you add $20 to the container, count what's in there. Include a small slip of paper and manually add up the money that you put in there so that it is very tangible and 100% real to you. Hide the container thoroughly each and every time you do this, and make the hiding place a little inconvenient to get to in the first place. The more of a ritual you can make this, the more likely this process is to stick.
Step Two: Set up Auto-Transfer
Okay, now you've got a few hundred bucks squirreled away, and you're ready to open up your savings account. Make sure you have the minimum amount, and make sure there are no hidden fees, and that you'll receive a nominal interest rate while your savings is in the bank (trust me, it's not going to be a whole lot, but even a penny a month is better than nothing, for now).
Once you've opened up a savings account, the next step is setting up an auto-transfer from your checking account to your savings account. The amount you transfer isn't all that important- you need to make sure it's something you can afford, while still feeling significant- but the regularity of the auto transfer is what really matters.
Personally, I've been doing this for several years now, and I've played around with monthly, weekly, and daily transfers. I've found that very modest daily transfers work the best out of all of these options for two reasons. First, you don't notice the money leaving your checking account, and when you're balancing your budget, you always tend to automatically stay far enough ahead. Second- and this might be the most important aspect of this entire plan- you will be able to watch the money transfer every single time you log in to your bank account. A feeling of progress, like when you were counting the cash earlier in step one, is crucial. Watching the money transfer on a regular basis- even if it's just a dollar a day- is an awesome feeling.
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Step Three: Don't Touch it!
Okay, so here's the real challenge. You've got enough money to start a savings account, having squirreled it away through frugal living for a while, and you have an auto-transfer set up so that your savings account increases just a tiny fraction each day - but it increases! This next step is by far the most challenging one.
Realize that, as a person living on a shoestring budget, you're going to be extremely tempted to transfer funds from your savings to your checking account. I'm not going to sit here all judgmental with my arms crossed and tell you I've never done this, but ... really, don't ever do it if you can possibly help it. This is where Robert Kiyosaki's advice from Rich Dad, Poor Dad comes into play for me—this is your cue to figure out how to generate enough money so that you don't ever have to move money from savings to checking. Short on funds? Write an article online for a few bucks, or pick up an hour or two at work this month. Sell something on craigslist. Have a yard sale. Do anything, but don't transfer the money from savings to checking if you can possibly afford it. Why? Because that money is your down payment on your next home, or it's your retirement fund. Whatever that money means to you, there's always some other way to come up with money for your immediate needs.