How to Save Money
No matter where you are at your life’s journey, if you want to improve your financial situation, or get a total finance makeover, the very first step you need to take is to save money. But for most things in life, the first step can be the hardest step you take in the right direction.
This article will help you with that. Armed with our 5-step plan on how to save money, you will take your first step in the right direction towards a healthy financial life.
Step 1: Set Goals
The very first step to save up more money is to set a goal for your finance and savings. Start by answering the following questions
1. What are you saving for?
You got to have a why. And the why needs to be big and motivating enough for you to stick to your savings plan. Are you saving for your retirement? Or maybe it’s your child’s college education. Maybe your dream house or your wedding. Write it down.
2. How much you need to save?
One thing most people miss while setting a goal is to make the goal measurable. You need to write down exactly how much money you need to save for your goal. Maybe you are saving up for a world tour. Then you need to save around $30,000. Now, that is a specific amount we can work with. Find out your specific amount. If you have more than one goal, find the specific of each and add them.
3. Set a deadline for your saving goal.
The other important thing we miss while setting a goal is to not set a deadline. This is the reason why most of the goals sit in the “maybe one day” zone. You have to set a specific deadline for your savings goal. Like, “By 31st December 2030, I will have $30,000 in my bank account for my world tour.” Set a specific date as the deadline, and be realistic about the deadline.
4. How much money do you want to save per paycheck?
Ideally, experts advise to save 10% of the money you make. But if you are struggling to make the ends meet, you might want to make it 8% or something, or if you are aggressive about saving more, make it 15% or higher. It depends on your income and expense ratio and your specific goals for saving.
Step 2: Set up a savings account
The next step is to set up a savings account. For this step, you need to consider 3 situations
- For short term goals: If your goal’s deadline around 6 months to a year, you have a short-term goal. For this, you might just want to keep the money on a separate account.
- For mid-term goals: If your goal has a deadline of around 3-5 years, it is a midterm goal. You can just save the money on a different account and not withdraw anything from that account to meet your goal. But you can also invest some of it in safe investments to make it to the goal a bit faster.
- For long term goals: If you have a bigger goal that may take more than five years, that you have a long-term goal. For long term goals, you must invest in safe investments to avoid inflation. Because you might save $30,000 in 10 years for your long-term goal of a round the world tour, but after 10 years, a round the world tour might cost $40,000. So, you will want to invest in safe investments, that might turn your $30,000 into $40,000 over than time. Invest in stocks, bonds etc. But always be sure to discuss with an expert in that area before investing in anything.
Step 3: Pay yourself first
This is where we get our savings started. The first thing you need to do is deduct a certain amount of every paycheck you get before you start your expenses or pay on anything else. Ideally, this is advised to be 10% of the paycheck. But adjust to your situation.
Step 4: Reduce your Expenses
You have to reduce your expenses in order to save more money. How much you need to reduce depends on your income to expense ratio. If your expense is more than or close to your income, you need to reduce more of your expenses.
To get a clear idea of what and how much you need to reduce, you have to track your expenses. Keep a notebook, and at the end of each day, write down all the places where you spent money and how much of it did you spend. Do this every day for a month. This way, at the end of the month, you will have a clear idea about where the money is going. Now, categorize them as the following.
- The absolute must: The money you absolutely must pay. The installments, loans, tuition fees of the children etc. goes here.
- The reducible: This stuff are necessary, but you can get them for cheaper. Like house rents. You can move to a cheaper house to save money on the rent.
- The cut worthy: You don’t really need these stuffs to survive. Just change a few habits, get rid of these and save all the money you spend on these. Like, maybe you have a habit of having a cup of coffee every day before going for work. While having the buzz after drinking the coffee feels good, you don’t need it. You can always cut that to save some extra cash.
So, you can guess what you need to do next. If you need more money in your savings account, just reach up to your list, and work on some category 3 and category 2 stuff, and you might find a place where you can save some money from.
Step 5: Commit to the plan
The hardest part of all these steps is to commit and stick to the plan. Here are a few tips to help you stick to the saving mode.
- Make a vision board: Make a vision board highlighting your end goal. In the case of a world tour, make a vision board with some pictures of places you want to visit. Keep it near your workplace, so that you can see it often, which will remind you about what you have to do and why.
- Journal: Keep a journal and write down your progress in it. This will motivate you and inspire you to keep up the work.
In the end of the day, saving money is not only about improving your finances, it is more about developing yourself as a more disciplined person. So, enjoy the process, the journey while you reach your ultimate destination.