7 steps to save money

Saving money provides the key to building wealth and becoming financial independent. Follow these seven tips on saving money to help achieve your dreams.

Step 1: Budget

A budget is really the key to money management. Compile a detailed list of all your regular monthly expenses and spending. Identify where you can cut down and draw up a new budget or spending plan. Before allocating money to anything else, you should PAY YOURSELF. Allocate at least 10% of you monthly spending plan to savings and investments. All other expenses are secondary to paying yourself. Paying yourself first will empower you to the achieve financial independence that is desired by so many and achieved by so few.

Step 2: Take care of the pennies

"Take care of the pennies and the pounds will take care of themselves." The small low cost items that we regularly buy without thinking can add up to a significant sum over a month. Watch what you spend on luxury and impulse items and the savings could be significant. The higher prices at the local quick shop may seem trivial, but the small amounts add up over time.

Step 3: Invest your savings

Your savings should typically be invested in a number of diverse instruments. You should have some liquid savings to cover emergencies. Traditionally, the remainder of your investments should be split between equities, property, and perhaps an interest bearing account such as the money market. Shop around and ensure that the companies that you use to build your investment portfolio are sound and trustworthy. Diversifying your investments helps to reduce the risks.

Step 4: Buy items on special

When shopping, try to buy the items that are on special. This can save you some money, but don't buy items just because they are on special. If you don't need it, then this will just add to your expenses.

Step 5: Get out of debt

Debt is the enemy of savings. Target your debts one at a time to eliminate each. Begin with the smallest debt and work your way through all each debt until you have got rid of each. If you do have a debt problem, then use the "pay yourself" amount allocated in your budget to get rid of debt. Once you are debt free, savings will accumulate much more quickly.

Step 6: Buy for cash!

Use your savings to finance your next appliance, furniture, car and even your house! The interest and finance charges on financing these items adds up to a substantial sum over time. You can achieve substantial savings by adopting the "old fashioned" approach of only buying something when you can afford it! It may take an extra year to get that new car, but you will have saved a lot of money in the process.

Step 7: Involve the entire family to achieve your saving objectives

You will be able to save more if every member of the family buys into the concept. Encourage the children to save for the things that they want from their allowance. When everyone works towards the same goal, you will be able to save much more money more quickly.

The seven tips are all closely related. They all hinge on the need for savings and the goal of achieving financial independence. It may be difficult to begin the process, but once you adopt the philosophy of "paying yourself first" the process becomes easier. As your savings build-up, you will find yourself in a position to pay for what you need (and perhaps what you want!) in cash.

Investing in Life Insurance

Life insurance is not an investment. Life insurance is a safeguard that must be in place to protect your family in the event of your death. For many years life insurance salesmen tried to sell endowment policies as an investment. They quoted huge returns on these investments which they advised us was the effect of compound interest. The simple fact is that anyone that has used life insurance as an investment vehicle has ultimately faced disappointment when receiving the payout many years later.

Endowments were the earliest form of life insurance investments. A valuation of the fund every three years allowed the fund to declare bonuses and allocate these to the value of an endowment policy. Linked policies became popular some time later. A linked policy allowed the investment portion of the policy to be invested in equity linked investments. Then there was deposit administration where investments were linked to a variety of investments including property. There were three main problem associated with all of these investment type policies. The first was the high commission that eats most of the first year's premium as well as much of the second. The second problem is the administration fees charged by the companies to facilitate the investment. The third is that no matter how well the investment performs, the cost of life cover remains the same throughout.

During the 1980's universal life policies became the main investment vehicle used by life insurance companies. Universal life differs from the earlier forms of investment linked life insurance. The first two problems remain the same, but the third problem disappears. As the investment grows, the amount of life cover required reduces leaving more for investment. Conceptually this is great, but the commission and expenses charged against this type of policy negate the benefits. Compare the commission charged against a straight investment and the commission on a whole life policy and the choice is clear and simple. Invest separately.

Suzie Orman has stressed stressed this point repeatedly. Do not buy whole life insurance. The only life insurance worth buying is term insurance, and when buying this get quotes from every reputable life insurer before committing yourself.

If you were thinking about taking out life insurance as an investment, think again. Term insurance is the only cost-effective form of life insurance. Investments can be achieved much more effectively through buying equities, property or through managed fund portfolios.

Are the benefits of life insurance worth the high premiums?

Life insurance can be expensive but it is an absolute necessity. There are a number of options available to manage that cost. One of these is low cost term life insurance. Other options may include finding the best deal by arranging for a variety of life insurance quotes and negotiating a lower commission from your broker.

John and Myra were in their early thirties with a three year old son and a one year old daughter. They had bought a new house and are building their lives. John's career is beginning to take-off and Myra is a stay at home mum. She has some part-time work that provides a little extra. She plans to resume her career when the children are a little bigger.

One evening Myra hears the door bell ringing. It rings again. It is the police. Myra hears the bad news. John has been killed by a hit and run driver in heavy rain on his way back from work. She is devastated. The family rally round.

After the funeral it slowly dawns on Myra that she has no resources with which to carry on. Even the funeral costs will be a drain on her limited resources. The mortgage repayments alone will take up more than her salary. She has been dealt a double blow. The life insurance that was deemed too expensive just a few months ago would have kept the family on their feet. Now what?

Over the next few years Myra may be able to overcome the financial blow. In the short term funds are required.

Life insurance is similar to pouring money into an empty hole until something happens to justify the cost.

Life insurance should be only a part of a balanced financial portfolio. The portfolio should include investments and savings. If you cannot afford the cover recommended by the broker then take less. As the investments grow, the need for life insurance diminishes.

One solution which minimizes the amount spent on life cover is a life policy that includes an investment portion. A variable universal life policy is a good example. As the investment grows, the amount of life cover reduces. The policy allows flexibility - additional funds may be invested to boost the investment, or the premium reduced to cover only the risk when times are tough. After a few years the policy provides a useful cash value.

The main objection to this type of policy are the expenses associated with it. This includes hefty commission. What it does ensure though is that the funds cannot easily be drawn in the early stages - a problem with most investments.

An alternative is to take term insurance. This should be coupled with a separate investment and the discipline to maintain the investment.

Life cover is expensive. One of the reasons for this are the high commissions paid to the sales-people. But life insurance is necessary. Shop around and find an affordable option. Even if you cannot afford the cover you need, remember that some cover is better than none.