Updated Aug. 3, 2021, 9:45 p.m.
Saving money is a common goal for people which is often delayed because they don’t even know where to begin. It starts with a plan but it requires action and commitment towards making even the smallest changes.
Getting out of high interest debt is a prerequisite to saving because it is a huge financial burden that robs you of your income. Follow the same process outlined ahead, but dedicate anything you end up saving towards eliminating your debt first. This is an accomplishment on its own, but once it is out of the way you may begin building your savings.
Find what motivates you to save and remind yourself why you shouldn’t always indulge. Remember that when you are saving, you are providing for your future self. You might be giving yourself an income or preparing for something life changing. It could be planning for retirement, buying a home, paying for tuition, or covering an unforeseen medical cost. In any case, you’ll be proud you had the foresight and financial discipline to make life easier later on.
Before being able to divert some of your spendings towards savings, the first step is to be aware of where your money is going. Many people underestimate the amount they spend on themselves. Find out how much exactly goes into your utility bills, housing costs, groceries, car expenses, restaurants, and everything else you can think of. It may seem tedious to record everything yourself, but thankfully there already exist applications like Mint, which automatically track and categorize your purchases made by the cards you have linked.
At this point you may separate your expenses based on necessity. Categorize your spending based on needs and wants. Your needs include your housing costs, utilities, medical care, and groceries. Your wants are where your disposable income goes, such as entertainment, luxury items, hobbies, and travel. Rank these in order of importance to plan what to cut first. This may sound simple to do, but many people have a hard time letting go of certain things in life which are actually a part of their wants.
You don’t have to remove all of the things that you desire, just weigh your options based on the question, “is the amount of joy this brings me worth its monetary value”. Sometimes you invest in your own happiness and that’s perfectly fine because in the end, you define your needs. However, you should evaluate what is actually necessary because you likely don’t need to spend as much on yourself as you do now. Simply think about rewarding yourself with meaningful or memorable purchases only.
Focus on your discretionary spending first, because it’s the easiest place to decide where to cut back. There are many possibilities to consider, but only a few will be named here. The important thing is to just start somewhere even if it’s small, and save just a few dollars a month if that is all that is possible.
A large portion of disposable income might actually be going towards food. The convenience of eating out comes at a cost. Limit eating out to once every few weeks and choose more affordable restaurants when you do. Plan meals to cook at home and buy only as much as you need to not waste food. For extra savings, buy generic brands of staple items to avoid the mark-up in cost from name brand products.
Buy things second hand! Items that are purchased new immediately lose a significant portion of their value. There may be a stigma associated with used items being dirty or broken. However, there are many reputable places to purchase your used car or amazing thrift stores to buy items like new.
Perhaps you have a membership to a service that you could do without, or you rarely use a subscription that has recurring payments. Do you need a variety of entertainment options, or do you primarily use one? It may be time to cut the extra cable if you prefer cheaper streaming services. These automatic payments are a constant drain on your checking account. Even a small change may have a large impact in the long term.
Reduce the number of yearly expensive vacations. Make a select few destinations or stay close to home and travel by car. Choose an airbnb instead of a 5 star hotel where you might rarely stay in anyways. This is by no means a comprehensive list of ideas, but should serve as a starting point to think about. There may still be a huge number of areas to work on that are unique to you, but again, just start somewhere.
By making a spending plan, you allow yourself a limit to the amount you spend on your wants without entirely removing them. Figure out how much as a percent of your income goes towards the cost of living, and consider that fixed. Aim to save as much of the remainder as you can and put it into a savings account.
From the popular 50-30-20 budget rule, one goal may be to reserve 20% of your income into savings, to put 50% goes towards your necessary spending, and the remaining 30% would go towards your discretionary spending. Of course your basic cost of living and disposable income largely depends on your personal situation, so you have the freedom to move around the ratios. You may divide these three areas further into subcategories to budget those as well.
Another thing that often helps is to entirely remove the choice from the equation. Automatically deposit a percentage of your income into your savings. The remainder should be more than enough to cover your needs, but also realistic towards other expenses so it does not become stressful. This could ensure that you meet your minimum savings, and you can optionally save more. Just be sure you don’t overestimate what you can live off, as you should still be comfortable.
Once you have established a habit of saving, don’t do all this work only to redirect your new funds into other unnecessary expenses. Try not to touch this money until you reach your goals. Now just continue saving, and consider investing to maximise your earnings, and let it grow.
Up next: find out how to reduce your necessary spending.
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