Perhaps, the most difficult thing about saving money is to make the first move and decide that today is the day your money-saving plan begins. The next important step is to set up a realistic savings plan so you have the right momentum to keep going. In any other case, chances are you will soon be frustrated by your almost-impossible-to fulfill financial goals and give up. The key is to develop the right habits that will allow you to pursue a doable goal. Here is some food for thought!
Record your Expenses
Every serious savings plan begins with knowing what goes in and out of the household. So, how much do you spend every month? Make it a habit to write down every single buck you spend, from your morning coffee to the snacks you buy after work. Once you have all your expenses noted, organize the numbers by categories (i.e. mortgage, groceries, gas, etc.). Total each amount. If you bank online, this can easily be done if you filter your statements to break down your spending. Of course, you may also use your credit card statements to figure these things out.
To help you get (and stay) organized, you may consider some handy tools, like Microsoft’s Personal Expense Calculator and Quicken. There are even apps to track your spending. Some really great ones are Dollarbird, Fudget, Goodbudget, Mint, Pennyapp, and Wallaby. Now, if you don’t mind the trouble, the good old spreadsheet can also do the job just fine!
Create a Budget
Once you get a pretty good idea of where your money goes in a month, you may start organizing your recorded expenses into a workable budget, which should demonstrate how your income measures up to these expenses. Apart from your monthly expenses, though, make sure you also factor in costs that occur frequently (i.e. car insurance or maintenance). That’s an excellent way to reduce overspending and plan your spending wisely.
Tip: Don’t forget to create a savings category within your budget (usually between 10-15% of your income). If you can’t save that much because you spend too much, then maybe it is time to cut back at some of your fixed monthly expenses.
Understand Compound Interest
This is swimming in a bit deeper waters but it is definitely worth it. Envision the potential of compound interest. There is a method in finance called the Rule of 72 that can help you achieve exactly that. Divide the number 72 by the projected rate of return you believe you will receive every year from an investment. The number you will get shows the number of years it will take to double that amount.
For instance, you invest $5,000 in a mutual fund. The rate of return (average) is 8%. Divide 72 by 8 (equals 9). So, it will take you 9 years to double your $5,000. See why it is important to start early on? Not only is it a superb motivator to watch your money grows but it also gives you more time to actually enjoy your hard-earned cash! Again, there are numerous compound interest calculators to illustrate how your money piles up. Some online calculators worth checking out are the one developed by Bankrate, the Calculator Site, Financial Mentor, and Investor.gov, to name a few.
Decide What You Will Be Saving For
What would make you sleep better at night if you knew you had taken good care of it (money-wise)? Save for a down payment for your house? Take your sweetheart and leave for a cruise to the Mediterranean some time soon? It could be anything, as long as it keeps you going. Some common short-term goals (ranging from 12 months and up to 3 years on average) include savings for an emergency fund, down payment for a car, and vacation while retirement, kids’ education, and remodelling/down payment on a home are some long-term goals (4+ years) set by most people.
Then, figure out how much time you will probably need to save money for that specific goal. And, since there is an online calculator for practically everything you may need to calculate, the Bank of America Short-Term Savings Calculator is one of the tools you may look into.
Tip: If you need to save for your child’s education or your retirement, it is best to put money into a 529 or IRA plan (or another investment account) so you can benefit from compounded returns, especially if you plan for something far in advance.
If You Need to Borrow, Let it Be For Investment
Borrowing money is not recommended because you enter a cycle of debt that could leave you broke and/or heart-broken. But, if you need to borrow, at least, let it be for investment, rather than to finance a lifestyle you cannot afford. Despite the fact that access to unsecured loans is easy, try to resist the temptation and only borrow money to invest in yourself for buying a house, gaining knowledge, training, education or another reason that will generate a long-term return. The only open option to borrow money to fulfil short-term goals is if you can pay off the debt before the due date; otherwise, it is totally counterproductive.
It’s okay if you mess up. There is no need to worry about it too much. What is most important is that you get back on the horse, learn from that bad move, and try to fix it or avoid making the same financial mistake again in the future.
Also know that you are not alone. A recent study showed that an overwhelming 96% of Americans experience, at least, four major life events that cause their incomes to drop by 10% and even more. So, if you made a financial mistake that caused you money loss, just cut yourself some slack and get back on track, especially now that you know better.
To lift your spirits, here is a very interesting article posted on Forbes magazine, that shares the worst financial mistakes financial advisors made that cost them tens of thousands of dollars. If they can have a bad day and survive it, so can you!
Manage Spending With Your Existing Income
The days of fixed bonuses and regular increments are long gone. For that reason, plan your expenses not on the income you expect to have in the future (say, after a raise) rather than your existing one. What comes into the household every single month shows how much you can stretch your legs in that soft, cosy duvet of yours. So, better put off expensive purchases until you can actually afford them 100%. And, if you do get a raise, it is much better to bank it since you have already grown accustomed to living on the amount you used to have.
Tip: Another way to manage spendings is by comparing prices before you decide to go ahead with a purchase. Shopping around will most likely get you a better deal. Therefore, wait until there is a sale on an item you require (if you don’t need it urgently). Sometimes, if we wait too long to purchase something, we end up realizing that we don’t need it any more.
Pick The Right Tools
Depending on whether you are saving for short-term or long-term goals, there are various FDIC-insured accounts to consider. For example, for short-term goals, a savings account and a CD (Certificate of Deposit), which allows you to lock your money for a specific time frame and at a specific interest rate are both great options. As for long-term goals, tax-efficient savings accounts like FDIC-insured individual retirement accounts, as well as investment products, like mutual funds and stocks (these are not insured by the FDIC) can help you save some bucks. However, keep in mind that securities are not guaranteed by a bank and are subject to investment risks.
Don’t Stop Living
Most diets allow a cheat day to help break the monotony of clean eating. Likewise, having some fun every now and again can help you enjoy this journey. Within a healthy discipline (it would be sad to spend your money over an evening out with friends after all the hard work, time, and effort you have put into saving it), make sure you leave room for fun and rewards. If, for example you have finally hit a savings goal (weekly, monthly it doesn’t matter), give yourself a pat of the back and do something nice and fun that fits within your budget.
Getting into the right mindset will trigger you to set aside some money for your financial goals. There is no doubt that shifting funds into a long-term account can de challenging, as it will probably mean that you need to invest money you regularly spend at restaurants or the coffee shop round the corner.
There is a ton of automated tools to help you save money. All is left is for you to decide is if it is time to start feeling content with planning your future while also living your days to the fullest (which doesn’t necessarily mean, the most expensive way possible).