How to Turn Savings from Everyday Purchases into Wealth


savings from everyday purchasesSaving is an important goal because it allows us to meet financial  obligations when it comes to unexpected emergencies and to prepare for a more comfortable retirement. Saving alone will not create wealth and that is why it is crucial to be disciplined in moving savings from your bank accounts to your investment accounts.

Set Realistic Spending Reduction Goals

Lets say you spent $250 dining out last month and have identified this as one of your budget items that you are determined to reduce. In order to be successful you want to set a realistic dollar amount to cut spending by. 10% is a great place to start and in this example would mean reducing the amount spent on dining out by $25 per month, an amount I think you’ll agree is obtainable without too much sacrifice. Now unless you are eating 4 meals each day, the money saved by cutting out one fast food meal will require you to eat at home so make sure that you account for that in your grocery budget.

Automate Monthly Savings Transfer

The single most important task in turning savings into wealth is to invest those dollars before you have a chance to spend them. Sounds simple doesn’t it? As we all know it is not that simple. Unless you keep your cash under your mattress, I hope you don’t, you can setup a monthly transfer from your checking into your savings. You can start small with a $25-$50 transfer each month and increase it down the road to match your savings goal. The important thing is to set a transfer amount that you can realistically meet each month and leave it alone.

Invest Only After Establishing Emergency Fund

To create wealth you need to 1) save more than you spend 2) Invest those dollars in the equity markets and 3) minimize the amount of debt you carry.  Most people get into debt because the don’t earn enough income to support their lifestyle, have impulsive spending behavior, or don’t have a sufficient emergency fund. I’m sure you have read that a typical emergency fund should cover your living expenses for 3-6 months.  Today’s economic situation is not typical and the US Bureau of Labor Statistics reports that the average duration of an unemployed worker is 40 weeks. Depending on the amount of your severance package, a 6 month emergency fund would not be sufficient to cover living expenses for the average unemployed worker and as you can see an 8 month emergency fund is closer to reality. There is no doubt about it, the economic changes over the last 5-6 years have caused financial challenges to Americans that will impact our standard of living.

What are the Options for Investing My Savings?

If offered by your employer, you can fund a 401K up to the maximum of $17,500 per year ($23,000 if age 50 or older). At a minimum you should invest enough to qualify for the employer matching contribution. Another option is a ROTH IRA which is funded with after-tax contributions and has a contribution limit of $5,500 per year, with a catch-up limit of $6,500 for those 50 or older. A benefit of the ROTH is that unlike an employer-sponsored plan or traditional IRA, you don’t need to take a minimum distribution after age 70 1/2. Funds can be left in a ROTH IRA to grow as long as you like. A traditional IRA has similar limits as the ROTH except the traditional IRA is funded with after-tax contributions.

So now that you are saving money each month and you’ve decided which type of investment is the best option, you need to transfer the money to a brokerage account.  If you are eligible, your employer can set this up for you or you can contact a brokerage like Vanguard directly. Once your investment account is established you can have a fixed dollar amount transfered from your bank account monthly and you can increase this amount to match your increased savings.

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24 Responses to How to Turn Savings from Everyday Purchases into Wealth

  1. Midlife Finance 01/16/2013 at 9:59 am #

    Investing in the 401k and Roth IRA is a no brainer. Once you set up auto deduction, you won’t even miss the money. It’s too bad many of us put investing last in our monthly budget. It should be first.

    • Paul 01/16/2013 at 6:14 pm #

      Couldn’t agree with you more Joe. I think sometimes we get hung up on the amount of money rather than just starting small and building. It is discouraging that minimum investment amounts make it difficult for the small investor to participate in the markets!

  2. Grayson @ Debt Roundup 01/16/2013 at 10:59 am #

    I waited a little too long to start investing. I have a 401k through my employer, but I wasn’t including much since I was paying down debt. Now I have a Roth and I am funding that well. I plan on upping my 401k contribution to the maximum match level.

    • Paul 01/16/2013 at 8:39 pm #

      I would definitely take advantage of the 401k match first and then fund the Roth. I have a 403b but unfortunately don’t get any match!

  3. John S @ Frugal Rules 01/17/2013 at 5:46 am #

    I think starting small is a great way to get started f you feel like you can’t afford it or don’t know where to start. That can help build a discipline so you can do more in the future. Added to that, time is nearly as important as the money you’re saving.

  4. Canadian Budget Binder 01/17/2013 at 1:58 pm #

    Invest after you build up your emergency savings if what we will be doing. Once we pay this mortgage off we want to make sure we set aside enough to cover expenses for a 6-12 months then maximizing investments. Sounds like the smarter way to go for us.

  5. John@MoneyPrinciple 01/17/2013 at 2:49 pm #

    It depends on how liquid the 401K/(ROTH)IRA system is. I had invested in a pension fund here in the UK which is about worth what I put into it after the 2007/8 crash. I can’t draw it out at all yet. So before you invest in any fund, make sure you can get at the money, even if there are annual limits in topping it up afterwards. You never know what is round the corner and a sensible line of credit may be a better way of handling emergencies. Unemployment is a different matter though as it can go on for a long time.

  6. Lakita 01/17/2013 at 7:05 pm #

    Hi Paul,

    Yes, it is possible to turn savings into gold. You are right. It does not only create wealth but turns us into disciplined consumers. Investing is another good move but we have to study carefully our options. It’s hard to recover lost money. Not all investment opportunities are safe.

    • Paul 01/19/2013 at 11:11 am #

      After paying off debt and establishing an emergency fund, I would invest at least enough to get the employer match in a 401K. Low cost index funds are a great way to lower costs and I would also recommend rebalancing your portfolio quarterly.

  7. Jane Savers @ The Money Puzzle 01/19/2013 at 4:48 pm #

    I am trying to do all 3 things at once – pay debt, develop an emergency savings fund and save for retirement.

    Paying debt is my main goal but I am investing my RRSP (Canadian registered retirement savings plan) to take advantage of the very tiny match from my employer and to reduce my taxes and get a good tax return.

    I have started my retirement savings plan very late but I will get there, maybe when I am 72, but I will get there.

  8. Melissa 01/19/2013 at 9:29 pm #

    Automating savings is a great suggestion. After a time, you don’t notice the money missing from your pay check and your bank account continues to grow at the same time.

    • Paul 01/26/2013 at 8:48 am #

      I don’t know about you Melissa but the automated transaction is a big timesaver as well. I have most of my bills setup as automatic payments as well.

  9. Jefferson @SeeDebtRun 01/20/2013 at 7:35 am #

    i can’t wait to start spiking our savings here in a couple of months once we are debt free..

  10. Mike @ Personal Finance Beat 01/21/2013 at 2:40 pm #

    I need to get into the Roth 401k game this year. I contribute 12% to my company 401k and invest about 18% of my net income in the market, so I’m happy on those two fronts, but I’ve been reading a lot of great things recently on the Roth that I know it’s got to be a must-have.

    Nice read.

    • Paul 01/23/2013 at 8:56 pm #

      You are doing much better than most with saving for retirement Mike and I applaud your discipline. After investing in the 401k at least up to the company match, the Roth is a great option for younger investors that expect taxable earnings to rise.

  11. Catherine 01/21/2013 at 5:09 pm #

    We’re in the process of setting up investments through hubby’s work, I’m excited, yet nervous since my investment knowledge is SO little…

  12. Brett @ wstreetstocks 01/22/2013 at 6:09 pm #

    Great tips! Having an emergency fund is very important. As you pointed the average time to be unemployed is 40 weeks. Individuals need to have a large fund that sustain their lifestyles.

    • Paul 01/23/2013 at 9:00 pm #

      A larger emergency fund is even more important now with the longer length of unemployment.

  13. Julie @ Freedom 48 01/23/2013 at 8:10 pm #

    I think if you’re cutting spending, you need to make a concentrated effort to set that money aside – so that it can accumulate as savings. If you don’t set it aside, you risk spending it on something else. That $100 less spent on restaurants can easily become $100 spent on a new pair of jeans – and then you’re back to square one.

    • Paul 01/23/2013 at 9:03 pm #

      That is exactly the point of the article, thank you Julie! It is not saving until you have those funds committed to an account that has the sole purpose of building wealth. If you leave the savings in a liquid account you are more likely to spend it!

  14. Martha 04/27/2013 at 12:45 pm #

    Nice tips! Automatic saving is a great idea and suggestion. A penny saved is indeed a penny earned.

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