Smart Saving Strategies: Maximise Your Savings with Proven Steps and Financial Literacy Basics
Are you saving? How much? How often? Are you tired of being told to stop spending frivolously?
There are enough tools and advice out there to tell you how to budget or what to spend your money on. I want to focus on small steps that get you there faster!
My journey has taught me that educating myself about finances is a good first step. So, let’s take it that simply and talk about financial literacy regarding the basics of saving.
Savings accounts
I have made many mistakes in my life, and they have cost me in the tens of thousands over the past decades. I don’t want to add that up, if I am honest.
When I was younger, I worked three jobs, one full-time and two part-time, just to make ends meet. I ended up taking on debt to live any sort of a life…like buying clothes requirements for that work where I was required to put on tights.
So, by the time I started making more decent money, anything extra went to paying down debt. It was a vicious cycle, and whenever someone told me I had to create savings and an emergency fund, my instant reaction was always, “Where do you expect me to find that money?”
Living cheque to cheque is no way to live. I know it.
So, if I can be the cautionary tale for you, so be it.
What I wish I’d known | No matter your income. No matter your debt. No matter your spending. You can still save.
Make it your priority, and don’t let any debt collector make you feel fear for putting yourself and your peace of mind first.
This is the advice I wish I had received.
So here are some thoughts on setting aside savings for backup security and peace of mind.
Wherever you are, start there.
Time for research
The same rules apply to the chequing accounts, you have some research to do.
Let’s use a common guideline, that the amount of money you should have in savings covers 3-6 months' worth of living expenses.
This is your emergency fund.
This fund is meant to provide financial security in case of unforeseen circumstances such as job loss, medical emergencies, or urgent home repairs.
How can you determine what the 3-6 months’ worth of expenses might be?
Here are some key points to consider when determining the right amount for your savings.
1. Monthly Expenses
Calculate your essential monthly expenses, including:
Rent or mortgage
Utilities
Food
Insurance
Are there any other necessary costs or expenses that you need to cover? Add them here.
2. Income Stability
You might be comfortable with a smaller emergency fund if your income is stable.
Consider a larger safety net if you are self-employed or work in an industry with fluctuating income.
3. Family Responsibilities
If you have dependents, of course, you will want to consider a larger emergency fund to cover additional expenses over the course of a year should you lose your job.
4. Personal Comfort Level
If you have been broke in the past, you know that the personal comfort you require is better than anyone else. Having a larger emergency fund for an added sense of security for up to a year can ease that fear of going broke again.
5. Debt and Other Financial Goals
I know better than anyone that if you have debt, you are told to pay it off first due to high-interest rates. However, in my personal experience, paying that down while maintaining a smaller emergency fund is suggested. Then, build the fund more substantially once the debt is managed.
6. Health and Insurance Coverage
If you have good health insurance, you might need less emergency savings for medical expenses.
Where do you place this emergency fund?
It's important to keep your emergency fund in a liquid and accessible account, but regular savings accounts don’t always pay interest.
At the time of writing, this expectation of a 2.5% to 3.5% interest rate is what you want to aim for in Europe. About 0.5-1.0% in the USA.
Here are the things to consider as you find an account:
Where you can quickly access the funds when needed
That is paying you an interest, even a small amount
Where you do not have to look at the balance every day and see how the money accumulates (resisting the temptation to withdraw it for unnecessary purchases!)
Then, of course, like the personal chequing bank account, you can regularly review and adjust your emergency fund as your financial situation changes. For example, if you start investing and receiving dividends, you can hold less in your emergency fund.
Finding funds
Where can you find the money for the emergency fund?
Telling you not to buy that latte is not going to cut it. That is the most frustrating component of all the books that I have read advising women on wealth creation.
So, let’s take a step back and look at the easiest way to start stocking away savings.
STEP 1
Calculate how much you can realistically put aside.
What I wish I’d known | You can always put something aside. Ask yourself, do you value yourself? Then pay yourself first. No excuses.
The good news is that you have already analysed your expenses and what you need. Regardless of whether your expenses make up 30% or 90% of your income, you know what that % is.
Divide your expenses by your income, and that is the % of your income you must pay to live.
For example:
Salary after taxes = 1800/month
Rent + utilities + food + insurance = 1100/month
Your % is 1100/1800 = 61.1%
That leaves 38.9% for discretionary spending, debt reduction or savings
STEP 2
Decide on a % that you will put aside.
Make it a % of your income and apply it to all incoming funds. Salary, bonuses, gifts, any income at all.
This is the % you will put aside in savings until you reach your desired goal of 3-6-12 months. Then, you can reevaluate that % at that time.
This accomplishes a few things:
It makes it easy to know how much to put aside each month and to calculate all incoming quickly.
You know that whatever is left in the account, you can put towards that latte without guilt!
STEP 3
Keep working towards a healthy earnings and savings profile.
For the future, as a rule of thumb, you want to move towards:
50% of your net income towards needs (living expenses)
20% of your net income towards debt or savings
30% of your net income towards wants (discretionary spending)
What I wish I’d known | Live small until you can live big, and rent a room or place where the cost of rent is 30-40% maximum of your income. This applies to mortgages, too.
As an introvert, I wanted to live alone, and so I took a small apartment, but not sharing my expenses was a surefire way never to get ahead. I have been doing that my entire life, and with no partner or husband, I have been a single income over paying rent every single month.
Then, I bought a place, and the mortgage and condo fees equalled 70% of my income.
I kept saying to myself it is better to own than rent and it is worth all the other sacrifices, but the truth is it is a detriment, adding worry and anxiety to your life on an ongoing basis.
How to set it up
Automatic transfers are built for ease, and you should take advantage of them.
If you know your income is consistent, or you know the calculation for the % you are using, then set up the transfer on the day of your pay. Then, it is gone before you even look at your bank balance!
Now, I am required to say that for tailored advice, it's always a good idea to consult with a financial advisor who can consider your unique financial situation and goals.
However, not all financial advice is created equal, so I would add that you should not trust anyone blindly, family, friends or financial advisors.
Always do your own analysis and research.
Be aware of your own situation and know the details of where your money is coming from and going so you can own your life design and wealth health.
You are well on your way now…keep going.
Important Disclaimer: This content is for entertainment and educational purposes only. Nothing in the content materials shall be considered legal, financial, or actuarial advice. Raj Hayer is not liable or responsible for any actions, inaction, or direct or indirect result of your choices and actions.
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