The reasons for this are varied: don’t have the money to save because of too many bills, a financial crisis (medical bills, credit card debt, parents leaving program), and don’t know how to save.
There is no getting around the fact that many family child care providers earn a low income; many make less than minimum wage. Although a very few providers make a profit in their business of more than $40,000, the vast majority of providers are living month to month and have little money saved.
Even so, the most important factor in saving money is not the money you have, but it’s rather the will to save. Do you have that will? I think so! As a provider you took the initiative to start a new business on your own and you have patience and perseverance to keep it running. These are the skills needed to save money.
Saving money starts with the understanding that it needs to be a high priority in your life. Saving for retirement, for example, has to be more important than buying a new television or eating out twice a week. If not, you will face a lower standard of living when you do retire.
To start a savings plan, start with small steps. It’s better to start off with a small savings goal ($25 a month) that you can increase later, than start with a large goal and find out a short time later you can’t keep it up. It’s not necessary to set up an ambitious savings plan.
The secret to saving money is to save small amounts on a regular basis (monthly) over a long period of time. The more time you have until you need your money, the faster it will accumulate each year. This is the result of compound interest. As your savings earns interest in the first year you will then begin to earn interest on your interest.
For example, if you saved $50 a month and it earned 6% interest, you would have about $618 at the end of the first year. In the second year you would have about $1,255. You earned $55 in interest the second year versus $18 the first year. In the fifth year you are earning about $280 in interest. It can be fun watching this grow!
Compound interest is a powerful long-term savings principle.
If you started investing $3,000 a year at age 35 towards your retirement and you earned 8% a year in an IRA you would have $339,850 at age 65. But, if you waited one year before you began saving you would have $311,898 at age 65. In other words, by not saving $3,000 at age 35 you lost almost $28,000 in your retirement account at age 65.
The message is clear. Don’t wait to begin your savings plan!
Here are some savings strategies to help get you started:
1) Identify a particular income stream as your source for savings. Some providers set aside the money they receive from one family as their retirement savings. Other providers use their Food Program check (part or all of it) or late pick-up fees as the money they set aside to meet their savings goal.
2) Make direct deposits into a retirement account. Force yourself to save by having money automatically taken out of your checking and put in a savings account dedicated to a short or long-term goal.
3) Develop a savings habit by writing a check at the beginning of each month to yourself before you spend money on anything else. If you start to run out of money before the end of the month, cut some expense (eating out, entertainment, etc.) to make ends meet. Don’t spend what you set aside for yourself. Instead, put this into a savings account.
4) If you receive any “extra” money during the year put it into a savings account. Extra money is money that you weren’t planning on receiving before the year began. This can include your tax refund, extra money received from an increase in your rates, annual increase in the Food Program reimbursement, late pick-up fees from parents, and so on.
5) When saving for retirement, make your investments throughout the year, rather than at the end of the year. Many providers wait until April to make their retirement contribution for the previous year. Instead, put aside something each month throughout the year. Investing $5,000 a year in equal monthly installments rather than at the end of the year will generate almost $55,000 after 30 years (at 8% interest per year)!
The above strategies are ones that have been used by family child care providers across the country. You can use them as well.
Tom Copeland – www.tomcopelandblog.com
This article first appeared on www.firstchildrensfinance.org
Image credit: https://www.flickr.com/photos/68751915@N05/
For more information see my Family Child Care Money Management and Retirement Guide.