Wednesday, August 29, 2007

What Do You Do With Any Money Saved?

I used to consider myself a "frugal shopper". After all, I NEVER (well hardly ever) bought things at full price. In fact, since shopping was a hobby for me, I often came across irresistable bargains! So it came as something of a shock to me to discover that my shopping habits weren't all that frugal after all. You see, I didn't end up with any spare money in my pocket. I just ended up with more STUFF for my money!

Now, buying things on sale IS a part of being frugal. And it's certainly a good way to go when $$ are tight and needs are high. I lived on Austudy living away from home allowance for a few years and $$ are definitely tight when you're living in a flat on your own and having to find both living and study expenses from a very meager allowance (which I was still very grateful for of course).

The problem with me was that this behaviour didn't stop when I started to have more $$ to manage. A good example of this was our kids Christmas presents. We set ourself a budget and most years I stuck to that budget. But I made it my challenge to get as many toys for that money as I possibly could. In my mind I was *saving* money but in actual fact I wasn't saving myself any money - I was just buying more STUFF for my money. :-) Now we have a $$ value budget based on full-price and anything I buy on sale, the money then becomes an actual SAVING.

Which brings me to the point of this blog post. What do you do with any money that you've saved through frugal habits? I now track all our spending and attempt to come in under budget on as many categories as possible. Some things (like our medical expenses) are hard to predict and so it's not uncommon for 1 or 2 categories to end up in the red at the end of the year. But overall, since I've started this tracking of spending, we've always ended our year with some kind of surplus.

Spare money - isn't that everybody's dream? LOL. So then I had to decide what to do with it. Spend it? Mighty tempting. Save it? Maybe. Put it onto the mortgage? Probably *should* do that.... :-) I ended up deciding that we would split the surplus. 60% went as extra payments on the mortgage, 20% went to building up our emergency fund and 20% we allocated to "blow" money.

I think having some *blow* money has been a really important part of our journey to a more frugal lifestyle. Sometimes things crop up through the year that we'd like to do but haven't really *planned* or budgetted for. This created a bit of an issue for us. Do we blow the budget or feel deprived? Neither was really going to encourage us with our budgetting and frugality plans. So by setting aside some of our surplus each year, we have some money purely for *play* (in addition to any "play" money we include in our budget). It's a nice reward for our frugal efforts and helps us not to get too intense as well. Both DH and I have a tendency to get a little TOO focused on a goal and can tend to overdo the frugality bit at times - so this is also a way to "shake us up a bit" and encourage us to let loose with the finances occasionally. I think in turn, it helps us to stick with the frugal stuff for the rest of the time instead of giving up because we've made it too hard for ourselves.

There is another good option though. You can put any money saved toward things that are going to lead to further savings in the future. Your savings then have a compounding effect a bit like cash savings in the bank do. Where the interest in the bank account starts to earn interest and over time the growth rate of your cash savings increases dramatically. The same can happen with frugality. If you *invest* the money saved into things that are going to save you more money in the future - your savings efforts can start to have a compounding effect.

This is what I've decided to do with my food money savings. At the end of this month I expect to have around $800 in our food budget that is surplus as a result of my "grocery challenge". Usually I'd leave this in our bank account until the end of our budgetting year. But I've decided in this instance that I'm going to set that money aside separately and use it toward building up our fruit and vegetable garden and buying more chooks. Potentially I could turn that $800 of *savings* into thousands of dollars in savings over the next who knows how many years. So just like compounding interest, my savings can generate more savings and so on.

Well, that's the plan anyway. LOL. I'll keep you posted with how my "compounding" efforts go. :-)


Ali said...

a great post! I lived on single parenting payment for many yrs and instead of saving money I got more for my money but that's what I needed to do then.

From next year, once we have completed our outside renovations to this place,including getting chooks etc. we intend to use our "saved" money from shopping more frugally and living simpler on the mortgage so that we pay it off within 10 years.

Anonymous said...

Great idea!! Please keep us posted how it goes.
I have a palm pilot with a budget program on it and it has been very interesting on how we are struggling to keep everything within the budget we have set, never mind under it! So I may not have the 'problem' of deciding what to do with my savings yet!
Madly Saving

lightening said...

Ali - that's right, there are times when you do need those bargains just to get through. Sounds like you have some great plans for the future! :-)

Madly Saving - Keep at it. I think tracking your spending is a great start. You might be surprised as time goes on. Even the smallest amounts can start to add up - especially if you apply the "compounding" effect. :-)

emma.jean said...

Hi Jodi,

Awesome investment idea re. the garden! I struggle to keep within my budget so at the moment I don't have a surplus and don't save more than the amount I allocate for savings which is building up an emergency fund... but I am definitely working on it.


Lil said...

Hi! Just thought I would leave a comment so you know I've stopped by. Found your blog through Fit Cat's blog. Have loved reading your posts from the last couple of months :)
Lil x

lightening said...

Emma - don't forget that paying off debt is a worthwhile investment as well. :-) Think of all the interest you're now *not* paying. That has a "compound saving" effect as well.

Lil - welcome and thanks for stopping by. I'm glad you've enjoyed your reading. Hope you come back again soon. :-)

Lib said...

Wow, what a Great post!!!!!!!!!!!
Our extra goes into emergency savings. Look forward to more great post of yours.

Rhonda Jean said...

Even though we live on a very low income, we save $150 every fortnight. We also save with a change jar and we always have money left over each month when every thing is paid for. Often that's $50 but it can be as much as $80 over the month. We put our money into an ING online account and use it for holidays or for big unexpected expenses. It's amazing what you can do when you change your attitidue towards spending and decide to save.