In the lead up to Christmas we are always bombarded with sales messages. “Save 50% here!”, “Buy one get one free!”. These offers come to us with the promise of “saving” us money. Are you really saving money? Probably not!

It’s often the case that we end up spending, not saving as a result of these messages.

The reason is the Big “Saving Money” Scam – we are fooled (including fooling ourselves) into believing we are saving money by taking advantages of these offers. The reason is that we don’t realise there are actually three different ways to save money.

The Three Ways to Save Money

1) Wants-Driven Saving
2) Needs-Driven Saving
3) Cash Saving

1) Wants-Driven Saving

Ever seen a special offer that really grabbed your attention?! One like “60% off this plasma TV but only while stocks last!” “75% off this leather sofa – only for the next two weeks!”. You might already have a perfectly good TV and sofa but you don’t want to miss out on such a good deal right?

The fact is that the sales price is often just the real price or acceptable price to the retailer. For example have you have you ever heard of a sofa store where there isn’t a sale on?!

The sale price is often the price they need to make a decent profit. The law may have required them to sell that item at “full-price” for a time in some of their stores, but in reality they are happy with the sale price.

The reason this is important is because we are talking about “Wants-Driven Saving”. This is a saving on an item you are tempted to WANT but don’t really NEED. And what compels you to buy is the false idea that you are saving money in the future by buying the item.

Are You Realling Saving?
In actual fact you’re not saving money, you’re spending money – right now! Managing your money well relies on thinking about cash flow – this is a cash outflow from your monthly budget – not a cash inflow. This is a false or fake kind of saving, which will lead you to actually increase spending and most likely increase debt.

You are also being subjected to a sales trick called “creating scarcity”. The seller creates the sense that there is competition with others and that you may miss out on this wonderful deal since “the offer runs out soon!” or “all the items might sell!”

These purchases give us a momentary thrill, they make us feel good for a little while. And we quieten the little voice in our head saying “you’ve just spent money idiot!” by justifying it as “future savings” when nothing could be further from the truth.

The sad fact is that millions of people drive themselves into financial difficultly doing exactly this – all the while thinking they are being “financially smart”.

2) Needs-Driven Saving

Needs-Driven savings remarkably enough are savings based on items you NEED, not WANT. These are savings on items you would have bought ANYWAY, even if there was no discount or offer. For example this could be a two for one offer on groceries or a discount voucher for petrol.

These are real savings as you are reducing the amount of cash flowing out of your pocket – cash that would have flowed out anyway.

One of the best money saving tips is to focus on Needs-Driven Savings when you are being bombarded with savings offers. Filter through them and find the right ones.

For example my girlfriend was recently offered a card that gave 50% off at a lot of London restaurants, for a price of course. Now if we dined out a lot, and felt this was something that fitted under one of our needs, then the card might have been worth it. However interestingly enough the 50% discount didn’t apply on Fridays and Saturdays at most places, the days we were most likely to go out. And also we were able to get 50% off vouchers for most of our favourite restaurants anyway for free elsewhere – so for us that fell under Wants-Driven Saving and we didn’t get the card.

So Needs-Driven Saving does mean you save money. Now what to do with that cash you didn’t spend? Funny you should ask…

3) Cash Saving

This is what I would call really saving money. Taking money from your paycheck and putting it into a savings account. Why – because the cash is still there. It hasn’t been spent. It is earning interest. You have actually saved money which is now building on itself.

Part of cash saving can also includes paying down debt. This is because you immediately reduce your cash outflows when paying off debt. See my previous post A Guaranteed Profit On Your Money? It’s Possible!

So if you take the cash from Needs-Driven Saving and pay off debt, you not only save that cash, but also get a guaranteed return on it. Now doesn’t that all sound better than option 1 above?

The Challenge with Saving

The challenge for us is the balance between the three, particularly with Needs- versus Wants-Driven savings. For example what would you call saving money on expensive Christmas presents? Did you NEED to buy expensive presents in the first place? No-one’s immune to this by the way, myself I’m partially prone to spending on gadgets like the iPhone!

The answer is, as always, “it depends”.

It depends on your personal circumstances. If you are knee-deep in debt (usually because of Wants-Driven Spending!) then you will need to restrict yourself to spending on only the things you need, look for savings there, and focus on paying off debt. If you have more flexibility then spending on things you want isn’t necessarily a bad thing – so long as you don’t kid yourself into thinking you’re actually saving money… and so long as you are cutting unnecessary expenditure elsewhere.

Think about the last few times you were tempted by an “once-in-a-lifetime savings” offer? Did you really save money?

The Big “Saving Money” Scam is a post from: Smart Money Mindset.com

Relying on just a pension to get you through your old age? You could be setting yourself up for disappointment, pain and financial hardship.

Are you being manipulated and ripped off by financial companies? Read below and judge for yourself. This post is for all of you not lucky enough to have a final salary pension from your company.

“A Guaranteed Return” on Pensions

“Pensions Offer a Guaranteed Return” is a line repeated by financial advisors and commentators across the world to convince you to take out a pension. It’s simply not true. Here’s why:

Let’s start with some definitions. Some common definitions of “guaranteed” are:

“Something that assures a particular outcome or condition”
“An unconditional commitment that something will happen or that something is true”

And of “return”:

“To produce or yield”
“a coming back again”

So a “Guaranteed Return” should be something that without question will happen, and will come back to you. Pensions are sold on the idea that whatever contributions you make, the government will add the tax back that you’d paid on that money – therefore a “Guaranteed Return” exists cause you definitely get that tax back.

So here’s the thing with pensions – yes, you get the tax break and employer contributions if applicable… but they’re not guaranteed to come back to you. This is because you have to leave the money in there for 30-40 years – and a lot can happen in that time…

You’re Charging Me How Much?!

One of the main factors reducing your pension pot is over that period your pension company will be charging you an annual percentage fee based on the value of your total pot. This has been shown to reduce the amount of your overall investment by over 40% (yes, almost half!) by the time you retire.

Over those 30-40 years you will also have inflation eating away at the real value of your money, so even if you have got more in the pot than you put in, it may be worth less in terms of what you can buy with it.

Wanna Mess With Your Financial Advisor’s Head?

Just for fun ask a financial advisor the following question about the “Guaranteed Return” on pensions:

“So are you telling me that whatever happens (“Guaranteed”) that my pension pot will be at least the money I’ve put in plus the government tax breaks on top, and that’s what will be available to me (“Return”) on retirement as a bare minimum?”

The answer will be something like:

“Errr… no… ummm… not exactly”

You:

“So would I be right in saying that with the management charges, and your charges, and the fluctuations in the stock market, that even with your “Guaranteed Return” it’s perfectly possible that on retirement I will have less money than I put in, and even that will be worth less cause of inflation, just like it happened to thousands and thousands of people in the US and UK?”

“Errr… yes?”

“So how is that a “Guaranteed Return” then?”

Silence…

The Guaranteed Return line is so embedded in the pensions sales pitch it’s ridiculous. On TV recently I saw a husband and wife being told that their personal pension would pay out a fraction of what they thought, and they would barely be able to survive on retirement… and the financial advisor there said (yes you guessed it!) “Pensions are still a good investment because they offer you a guaranteed return”. I would say to that financial advisor try telling that to someone who’s got less money than they put in… but he actually did, on TV!

Oh, and did I mention that you of course do get taxed when you eventually take your pension.

So although pensions are sold as a rock solid “Guaranteed Return” investment, they are still an investment, with all the risks that come with investing. Plus unlike other investments, unless you’ve gone for a pension you personally manage, you have little real control over how that money is managed. Historically we can see that pension funds have NOT on the whole outperformed the market… but they still charged you for the priviledge of “managing” your money though.

Even the Power of Compounding is Taken Away

Pensions are also sold on the idea that the contributions you make will build and compound over time to give you a large pot of money at the end. Those of you who understand compounding (see my free debt report on the right for more information on this) will know that the amounts invested in the early years are the most important as they can build for the longest time.

Guess when most of the fees are taken for pension… yep, that’s right, in the beginning! So when your pension pot should be building up nicely to compound over the next 30-40 years, massive chunks of it are being taken away to pay for set-up fees, financial advisor fees. It’s not unheard of for these fees to amount to 60-70% of your contributions in the first few years, costing you massively by severely reducing your future pension pot.

Inflation is Going to Eat You Alive

Now let’s say you’re one of the lucky ones – you have a good fund manager, they make you a decent amount of money and you cash in your pension pot when the stock market is riding high.

That lump sum of cash now has to go into an “annuity” and a company will do that for you. So that cash goes into a relatively “safe” investment, such as government bonds, and gives you an income per year. How much this is depends on the annuity rates at the time (e.g. 5%) and how much you put in.

The problem is that the annuity doesn’t increase with inflation. So as you live into your retirement you’ll see prices increasing around you, and your money not being able to buy as much, year by year. With people living longer and longer inflation can literally eat you alive.

For example let’s say inflation runs at a relatively stable 3% and you’ve been “lucky” and have lived 25 years into retirement. Your annual income will now buy you less that HALF of what it did when you retired. (If you want to know the calculation for this let me know).

So even if you were able to get a decent annual income on retirement (no easy task) you could end up in your final years trying to get by on a very small amount of money. More than likely you were just getting by when you retired, so who knows how bad it could be after inflation has its way with you.

So what’s the alternative?

Well there’s no easy answer to this. I’m not saying that you shouldn’t invest in pensions – just that you should understand completely how they work and the risks you take on – and please don’t tolerate anyone spinning you the “Guaranteed Return” or “Safe Investment” lines.

Relying on the government to help is also a mistake. Government pensions are unlikely to even provide a basic level of income in most countries, especially with relatively less young people paying tax to support an ageing population.

The alternative is really a mindset shift. Stop thinking that you’ll be able to rely on your pension alone – it’s a dangerous game to play, a game where you can have little or no control. Ultimately it’s about building and creating multiple sources of income upon retirement (e.g. buy-to-let properties, other savings, investments in bonds etc.) and investing in yourself.

With people living longer and more importantly, maintaining their health, 65 is now just an arbitrary age for retirement, based on an industrial age way of thinking. Most people on retirement can be just as economically productive as they were, if not more, and age is less of a restricting factor. Chances are after working for 30-40 years, you’ll be bored to death (forgive the pun!) on retirement and looking for something to do anyway!

Why not teach yourself the skills now so you don’t have to rely on just a pension to get you by. Just a thought…

Relying on Your Pension? You’re Dead Already is a post from: Smart Money Mindset.com

Though the current global recession seems to be easing we can all still use tips to help us save some of our hard earned money. Just by utilising a little creativity and changing our mindset we could each be saving hundreds, if not thousands per year and increasing our own bank balances rather than those of the loan companies!

3 Top Tips for Saving Money

Mortgage lenders, loan and credit card companies all use the law of compounding to make sure they squeeze every last penny that they can out of you. Not only do you pay interest on your loan, but you pay interest on the interest. This is how financial companies keep us in debt for as long as they possibly can and they certainly don’t want you to know these tips for saving money!

Stay With Your Current Mortgage Provider

Yes, you read it right! One thing that many people do not realise is that when you change mortgage lender you also reset your interest payments to start from the beginning. Since the majority of your monthly mortgage payments in the first 12 years is actually paying the interest rather than the actual loan, when you switch to a new lender you actually restart this process. This means that the more times you change lender the more interest you will pay over the lifetime of the mortgage. What a waste of your money!

Ask Your Credit Card Company for a Lower Rate

Another one of my top tips for saving money is asking your current credit card provider to lower their interest rate for you! Just give them a call and ask them. Point out what a good customer you have been, how you pay on time and that you would like a reduced rate please. The customer service advisor may be a little surprised, but you can get a reduced rate if you negotiate in the right way.

Save Money on Anything Using Simple Negotiation Techniques

Try these out to see for yourself how you can buy nearly anything, from an apartment to an apple, for lower than the ticket price.

Act reluctantly – Pretend you are not interested in the product and watch the salesperson lower and lower the price until you buy!

Ask for more than you want – Always offer a price lower than what you are actually willing to pay. 9 times out of 10 you will pay either what you wanted to or less than you expected.

Which of these top tips for saving money will you try? If you decided to do all of these things you could save yourself hundreds per month – think of how those savings could be used!

3 Top Tips for Saving Money is a post from: Smart Money Mindset.com