Saving Strategy

About 8 minutes
 
Okay, we’ve covered some basics, but now it’s time to get to the really juicy stuff – it’s time to talk saving strategy. If you want to be successful with your finances, you need to do two things;
 
1) Regularly set money aside
 
2) Hang onto and grow that money
 
Here we’ll be talking about the first one, saving.
 

Let’s face it, saving money can be tough

Not to get too sciency here, but you might even have your hunter-gatherer ancestors to thank for that. Their nomadic lifestyle and day-to-day survival needs probably made it difficult, or possibly disadvantageous, to accumulate meaningful wealth, and so we may have inherited their lack of long-term planning and love for instant gratification (hence why we impulsively check our Instagram feeds?).
 
In other words, we simply may not be hardwired to save. Still, it’s no excuse. In fact, it’s all the more reason why you need to be proactive with your saving strategy. If you’re reading this, chances are you don’t spend your waking hours looking for berries and outrunning large carnivorous animals. Our situations have changed, and so must our habits.
 

Set a saving target

Aiming to save a specific percentage of your income is a great way to simplify your savings while also giving you a concrete, measurable goal to strive for.
 
So what’s the right number? A common rule of thumb is to try to put at least 20% of your after-tax income towards your financial priorities. And no, we aren’t talking about shopping sprees and trips to Bali, but rather things like building your emergency fund, paying down debt, and investing for retirement – actions that grow your net worth.
 
However, while rules of thumb can be helpful, they don’t always work for everyone. So you’ll need to figure out what’s right for you.
 
If 20% simply seems too high for you right now, you can start with a smaller amount and then work your way up over time. Maybe aim for 1%, then 5%, then 10%, then 20%. After all, saving anything now is better than saving nothing. Or if you’re already comfortably putting away 20%, push yourself to save even more. The more you save, the sooner you’ll reach your goals.
 

Make saving automatic

Setting a savings target is great, but of course knowing that you should be saving money is not the same as actually doing it. A good way to make sure you follow through and consistently put money away is to automate your savings.
 

Direct Deposit

One way to automate is to set up direct deposit so that your paycheck goes straight to your bank account. Most banks will allow you to direct your money into various sub-accounts so you can designate a portion of each paycheck to specific things like emergency savings, paying down debt, and general spending.
 

Retirement Accounts

You can also direct some of your money into a dedicated retirement account (like a 401(k) or IRA). This money will be even harder to spend since it’s essentially locked up until retirement. These accounts also offer tax-benefits and some employers will match a portion of your contributions.
 
And if you’re worried that sending too much of your income to your savings will put a strain on meeting day-to-day needs, you can always try it out and then adjust your contribution amounts later if you need to. You might even be surprised at how much you’re able to save.
 
If you want to learn more about automating your finances, we have you covered.
 

Review your spending habits

While automation can help you save more with less effort, it’s also important to know what you’re currently spending your money on. So you’ll want to review your credit card and bank account statements.
 
We know, this isn’t particularly pleasant, especially if you’re feeling financially stretched, but you need to start from a position of personal honesty. Try to remember, the goal here is to set yourself up for a better future, not to dwell on the past.
 
Schedule some quiet time in your calendar when you can go over your accounts, and consider doing it once a month until you feel like you’re on the right track.
 
You don’t necessarily need to know where your money is ending up down to the last dollar, but you’ll want a rough idea of where it’s going.
 

Use a budget to maximize your savings

Once you’ve taken a look at where your money has been going, it’s time to think about where you want it to go. Which means it’s time to talk budgets.
 
But wait! Before you close this site, shut off your computer, and throw it into a fire, we have something to tell you – budgeting doesn’t need to be a pain.
 
We know that some of you love to track and monitor every last item of your expenses, which is great! Keep it up. But for most of us, this doesn’t come naturally, and trying to force this amount of discipline will likely have the same results as trying to adhere to a crash diet; ice cream binges and tearful nights. So if you’re looking for something simpler, you can try a simple budget to start.
 

Simple Budget

With a simple budget, the idea is to set a saving goal (say 10% or 20% of after-tax income) and then not really worry too much about what you’re spending your money on as long as you’re meeting your goal. You can adjust your spending if you’re falling short, but you don’t need to sweat the details.
 
The benefit of this approach is that it doesn’t require much work and can still be a very effective way to save money. This might be enough for you. However, we should point out there is a drawback to the simple approach – it won’t offer much insight into your spending habits. This is where a more detailed budget comes in.
 

Detailed Budget

With a detailed budget, you, well, get into more details. You can track individual expenses or you can bucket expenses into groups or categories. This will help you see more specifically where you’re money is ending up and will make it easier to see where you can cut back if necessary.
 
We have a budget calculator to help you get started. There are also a number of free apps that will automatically track your spending for you and some banks now even offer their own tools to help too.
 

Is it better to focus on the big expenses or the small ones?

If you’ve ever read anything about personal finance, you’ve probably heard people point out that if you cut out one pricey coffee every day, eventually these relatively small savings will add up to real money over time. A valid point.
 
On the other hand, some financial gurus will tell you to skip worrying about the small stuff and focus on the big items, like housing, healthcare and transportation. If you can spend slightly less on your apartment, you can make up for hundreds of lattes in one well-caffeinated swoop. Hm, also makes sense.
 
So who is right?
 
Well, they both are. Those larger expenses, like housing, are usually harder to adjust in the near term, but will give you a bigger bang for your buck if you can bring them down. The small stuff matters too though. Frequent sneaky expenses can add up to serious money, so don’t let them squeak by unnoticed.
 

Ultimately, your spending habits should be dictated by value – what you get for what you pay.

 
Maybe those coffees are worth their weight in gold to you, and that’s perfectly fine. The key is to eliminate or reduce things that are costing more than they’re worth to you. We’re constantly bombarded with media telling us what to like, how to dress, what to spend, so it’s easy to get brainwashed into spending money on things we don’t need or maybe don’t even want. It’s important to fight this urge and think for yourself.
 

Basics versus luxuries

It can also be helpful to think about your expenses in terms of basics versus luxuries. What expenses are essential and which ones could you possibly do without?
 
We aren’t necessarily suggesting you cut out your luxuries, but this can at least serve as a guideline for what you might be able to reduce or eliminate, especially if circumstances required a drastic change in your spending, like if you lose your job.
 
Also, if you’re having trouble cutting back on impulse purchases, you could try paying with paper money for a while (we know, super old school). Research has actually shown that people spend more when they pay with plastic (credit and debit cards) and consumers may even be more emotionally attached to purchases made with cash or check than with cards.
 

Review and adjust your budget and account for life changes

You’ll want to periodically review your budget to see if you’re meeting your goals or falling short, then adjust as needed.
 
If you take the more detailed approach of tracking individual expenses, you may want to be somewhat flexible with your particular expenses. It’s likely that in some months you’ll be over budget on some things, and that’s not the end of the world. Try to make it up on other expenses or in the next month if possible.
 
It’s also important to prepare for major life events that will impact your financial situation. Some changes, like paying off a loan or getting a promotion, might tempt you to increase your spending, but don’t lose site of your goals. Other changes, like buying a home or having children, can have the opposite effect, so you’ll need to prepare for these events and adjust your spending plan as needed.
 

And remember to save for fun things too

Having a saving strategy shouldn’t just be about necessities. It’s important to include the exciting stuff too, like vacations, concerts, and dinners with friends. What’s the point of doing all of this if you can’t also enjoy your money anyway? Saving for fun stuff might just make the difference between sticking with your plan and giving up.
 
Of course we aren’t suggesting you splurge all the time, but it’s important to find a balance between adultish financial habits and living an enjoyable life.
 
 

Key Take-Aways

1) Put some of your income towards financial priorities. You can shoot for 20%, but if that’s too much, start smaller and build your way up.

2) Make saving money automatic with direct deposit and specific sub-accounts.

3) With a simple budget, you set a saving target and don’t focus on the details as long as you’re meeting it. With a detailed budget, you track individual expenses or expense categories and adjust as necessary.

4) When you review your expenses, focus on the size, the value, and whether or not it’s essential or a luxury.

5) Monitor and adjust your spending over time and keep up with life changes.

 

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