Today, almost everyone knows the importance of savings and how they significantly improve life. However, while some find it easy and natural to save, others struggle to hold onto every penny and can’t even begin to invest. Let’s try to address the main question of these individuals: “Why can’t I save money? A Step-by-Step guide how to start” for them.
How to Save Money
A sensible approach to personal finance suggests that a person doesn’t spend all of their income. Instead, they set aside a portion for savings, whether it’s for significant purchases or important needs like children’s education, retirement, or the dream vacation they’ve always wanted. Some may argue that saving isn’t necessary today; everything one needs can be bought on credit.
However, relying solely on credit isn’t always the best solution. For instance, there might come a time when regular income isn’t sufficient to cover existing and new loan payments. Or a bank might refuse further lending due to excessive debt. Additionally, they may deny a loan if one loses their job or faces a serious illness. Investing borrowed funds isn’t the wisest choice. The returns may not always cover the interest, and the loan will still need to be repaid.
For each of these scenarios, it’s better (and sometimes essential) to have personal savings. But how does one start saving if they find it difficult? Below are several simple yet effective saving money tips.
Setting Financial Goals
One of the main conditions for success is interest, having an incentive. Money saved just because it’s necessary won’t mean anything to you. As a result, you’ll inevitably spend it, even if you hadn’t planned to, driven by momentary whims.
The primary motivation for saving is having a goal. Turn your dreams into goals, and the motivation will be maximally effective.
- Dreaming of owning your own yacht? Start saving. Even if you don’t gather the entire necessary sum on time, the loan terms for the remaining amount will be considerably more lenient.
- Want your child to receive an excellent education? Save. Over the 10-15 years before they enter university, you can accumulate a substantial sum. Whether it’s enough to cover the full term of their education or not is not the main question.
- Hoping to retire without financial worries, to live comfortably and travel the world? You know what to do, save. Over 3-4 decades, you’ll surely have a sum that will satisfy your desires.
Isn’t it true that it’s simpler not only to dream about something but also to take real steps to turn that dream into reality? And setting aside a portion of your regular income is certainly not the most challenging of those steps.
Financial Planning
Setting a financial goal is an important but not the only step for those who want to save money. A goal without a plan will remain unattainable.
Generally speaking, this isn’t about strict plans where every move is written down. Financial planning doesn’t require such rigid instructions, like, “On Friday, June 13th, you must set aside $500.” Rather, it’s a general guideline for achieving your financial goals.
Include in your plan:
- The set goal. Write it down as specifically as possible. For example, not just to save $50,000 but with an indication of what you’ll need it for.
- The planning horizon — the timeframe within which you intend to achieve the specified goal. Make sure to allow for adjustments. For instance, if your income increases and you can save more, you should have the option to shorten the time to reach your goal.
- The sources of income from which you’ll allocate money for savings. These can be regular payments (e.g., salary, dividend income) as well as one-time payments, such as bonuses, fees, or returns from time deposits, etc. Besides the income items themselves, try to specify what portion or specific amount you can allocate for savings.
This financial plan will become your working document. You’ll only need to regularly mark its implementation — indicate the dates and amounts you’ve saved.
Emergency Fund Creation
You’ll often come across advice to start saving by creating an “emergency fund”. Listen to this advice. Indeed, you won’t be able to achieve your financial goals if you suddenly lose your job, fall seriously ill, or face other reasons for unexpected expenses. You should understand that your savings as a means to achieve your goal are inviolable. And in case you urgently need money, you should have some cushion, which we call the “emergency fund”.
Its size can be relatively small — 3-6 months’ worth of family expenses. With this amount, for example, you’ll be able to find a job after losing it, without dipping into your main savings. However, remember — after depleting the “emergency fund” and resuming contributions to the family budget, you’ll need to replenish the emergency fund. Otherwise, the next unforeseen event could lead to financial ruin for you.
Money-Saving Strategies
To make financial plans come to life, you’ll need to choose and follow an appropriate savings strategy. These could include:
- The “50/30/20” rule proposed in the book “All Your Worth: The Ultimate Lifetime Money Plan” by Elizabeth Warren and Amelia Warren Tyagi. According to this rule, income should be divided as follows: 50% for necessities (rent, mortgage, transportation, groceries, utilities, etc.); 30% for wants and personal desires (shopping, dining out, vacations); and 20% for savings.
- Budgeting techniques like the “6 Jars Budgeting Method”, “4 Envelopes”, and others. They involve dividing the budget into several unequal parts. The largest portion is allocated to regular expenses, while the rest is distributed to other needs such as major purchases, education, and savings. The last category is mandatory, representing 10-15% of the budget, and is treated as untouchable unless necessary under specific circumstances.
All these techniques of personal finance management can and should be combined with the rule “Pay yourself first, then others,” proposed in the book “Think and Grow Rich” by Napoleon Hill. The author tells readers that savings are a crucial component of future wealth, and money should be set aside first and spent later. If you start using this rule, you’ll notice that you’ll adopt a new philosophical approach to savings, making it significantly easier to save and achieve your financial goals.
And here’s another practically obligatory rule for all money-saving strategies: Invest! Saving money in a bank account is a great idea, but without investments, you’re unlikely to achieve significant success. You don’t need to be a professional in investment to do this; simple solutions work just as well. For example, invest your saved money in a simple ETF on the S&P 500 index, and it will generate a 20% return for you every year. Moreover, the rule of compound interest will start working for you as well. Try it, and you’ll see how much easier it is to achieve your financial goals.
What Do You Need to Start Saving Money?
Everyone who says they can’t save money for objective reasons is lying. There’s only one reason why a person can’t save money — the unwillingness to do so. For example, there are families where a regular income is only enough to cover basic needs — utilities, mortgage, transportation, groceries. They claim that under no circumstances can they allocate even 10% for savings.
To be blunt — they can’t save because they’re currently satisfied with everything. However, there might come a moment, for example, during the next wave of inflation, when their income will no longer cover expenses. And what to do in this case — apply for assistance? Declare bankruptcy? Wouldn’t it be easier to think about it now and start looking for opportunities to earn extra income or switch to a higher-paying job? Then opportunities for savings, an emergency fund, and savings for realizing another dream will arise.
However, this is an extreme case. Most people cannot start saving due to the detrimental habit of mindlessly spending money. A simple example: according to a survey on the Rakuten Rewards website, 96% of American respondents admitted that they uplift their mood by shopping. Overcoming spending habits is undoubtedly a challenging task. However, it is entirely possible to solve it.
Get yourself a mobile app for home accounting. Carefully enter all your expenses into it. Then, at the end of the month, analyze them. Ask yourself, which expenses could you do without? How much money could you save instead? And also, ask yourself, what is more important to you — the hundredth pair of shoes or financial well-being in the future?
Of course, no one is urging you to give up all pleasures and entertainment. However, thanks to such constant expense tracking, building a savings habit will become much easier.
However, let’s repeat once again — this will work only if you want to cultivate frugal living habits in yourself. Then you will start keeping home accounts, learn to cut unnecessary expenses. As a result, “extra” money will appear (although when were they ever “extra”), which you can easily save and invest. Try it — you’ll definitely like it!
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