A Simple Formula...

With the financial uncertainty of our current economy, I hear more and more people who are discussing personal finances. One of the most common questions is, "How do I save"? Well, after painstaking research, consulting many financial gurus and taking a few online accounting courses, I believe I finally have the formula:

(Money you Earn) - (Money you Spend) > 0 = (Money to Save)

For those without the mathematics background, it's simply "Spend less money than you earn to have savings". Although this is a relatively simple concept, it is surprising to see how many people do not understand it.

Below are some of the common reasons that prevents people from saving money.

Common Mistakes that Prevents Saving

1. Keeping up with the Jones's

David Ramsey said it best when he said "People buy stuff they don't need, with money they don't have to impress people who don't care". I believe it is human nature for people to want something that someone else has, however, after we get it, we find that it was not all that it was cracked up to be. So, how do we cope with that? Rather than learning from the previous experience, we usually repeat the process and try to get the next best thing that someone else has to satisfy that fictional want.

2. Abusing Credit Cards (Buy now, pay Later)

"I will gladly pay you Tuesday, for a hamburger today". - Wimpy

Now although I am not against the use of credit cards, I do believe that they should only be used by people who are mature and disciplined enough to use them correctly. Unfortunately, we have this facade pulled over our faces when using a credit card that makes it seem that the money being spent really is not really our money being spent. We never hit reality until the bill comes at the end of the month showing the grand total of the expenses charged to that card. Many times, rather than paying the balance in full, we pay the minimum payment, accruing interest on our new debt as well as prolonging the inevitable, paying off the bill in its full amount.

3. Being Impatient (Buy Now, Why Wait)

With the "Gotta have it now" and "E-Demand" syndrome that is plaguing today's consumers, it is an understatement to say that patience is no longer a virtue. Impulse buying may temporary satisfy immediate wants, but causes for remorse when we realize that the money spent could have been allocated to a better cause such as rent, car payment, electricity, etc.

4. Not Planning for the "Unexpected"

I am a strong proponent of having an emergency fund. Life throws many unexpected events your way all the time and we find that we eradicate our savings for retirement, house, car, etc. when we need quick money for these events. This is detrimental to the savings cycle because you never actually save money. With the Emergency Fund, you have a dedicated "In case stuff happens account" (insurance) against life's unexpected events.

5. No Budget

"If you fail to plan, you plan to fail".

This may be one of the bigger reasons why a lot of us cannot seem to save money. Not having a general idea of how your money is allocated can cause you to spend too much in an area in your life that probably requires moderation. Before I had a budget, I spent a TON of money eating out. I always had allocated money for my re-occurring bills that I knew that had to get paid, however, it was almost anything outside of that was being spent eating out. After tracking my expenses and developing a budget, I was able to start allocating more to savings and setting aside a smaller but guiltless budget to discretionary spending. Best believe, my wallet and my waistline were both thankful for that!

So in summary, although saving money seems like a very simple idea, there are some obstacles in the road that hinders some of us from getting out of the starting blocks. Even if you take a small step in the right direction, it is still a step in the right direction. Start today by trying to eliminate some of the common mistakes to begin your journey to personal financial freedom. As always, leave your question and comments below. Stay Disciplined!