There will never be a one-size-fits-all plan to save money. After all, finance is a very personal thing. We all have different goals. Sometimes it’s to save for marriage, children, vacations or to buy that new shiny car you have your eyeballs on for a long time. And sometimes, it’s just having the desire to have as much money as possible.
That being said, the route to savings will always rely on the same principles. The more you earn, the more you should save.
According to Forbes, having a year of salary saved up by the time you’re 30 is a realistic and smart number to aim for. The median salary for the working 25-34-year-old is about $40,000 a year. This means that $40,000 in savings should be a minimum goal. However, don’t start to panic if you’re nowhere near that number. Instead, re-evaluating your savings goals and progress is important.
So, how can you start to maximize your savings?
Learn How To Budget
Let’s start with budgeting, shall we?
There are plenty of ways to learn how to budget. Some people may claim that they can stick to a budget without keeping by any rules. However, it’s a lot easier when you have specific numbers in mind. One of the most popular strategies to budget is to live by the 70-20-10 principle.
This principle relies on both saving and learning how to spend your income in the smartest way.
The 70 represents 70% of your income that you should spend on your living expenses. This includes all the things that you absolutely need to live your life. So, things like rent, food, transportation, and necessary clothing fall into this category.
The next category means that another 20% of your income should go to savings. “Savings” encompasses a whole lot. Many sources will recommend that you break this 20% into 3 separate savings accounts:
- 10% for retirement
- 5% for an emergency savings account
- 5% for specific and personal goals. This 5% would be where you keep savings for things like a vacation, a new car, or whatever you’ve had your eye on for quite some time.
The final 10% is meant to go to your debt. Credit cards, student loans, car payments, and any other debt you may have will fall into this category.
It is possible to mold this budget plan to your preference. If you have a lot of debt, you may choose to temporarily swap that category to 20% and keep your savings to 10% until you are debt-free. If you are good at keeping your living expenses low, you can lower that category and put more towards your savings or debt. Like I’ve said before, debt is personal. It’s nice to have an outline, but sometimes things need changing. Though, the 70-20-10 rule is a great place to start, especially for those who have never stuck to a format before.
The 50/30/20 rule was developed by Harvard expert for bankruptcy, Senator Elizabeth Warren from Massachusetts. All you need to do is to organize your spending into three parts. 50% of your paycheck should go to your needs. These include groceries, utilities, housing, car payment, insurance, and health.
30% should go to your wants. These include entertainment, hobbies, and eating out.
What you are left with is 20% which should go directly to your saving. But how do you make your income fit the 50/30/20 rule?
Limit Your Needs to 50%
Figure out all the things that you can forego. Entertainment is one of them. Take this out of your needs category and see how far back you can push the amount that you spend every month on your needs.
Note that that credit card payment may be considered a need as not paying the minimum amount can cause your credit score to drop significantly. This can affect your chances of securing a loan in the future.
Calculate Your Wants And Cap Them At 30%
30% on wants might sound great on the surface. You are probably thinking of shopping every weekend, Japanese restaurants and going on vacation. Wants are tempting and this is especially why they need to be limited.
Sit down and analyze all the things you want to do for entertainment such as going for drinks over the weekends. Make sure that the budget stays within 30 percent of the after-tax income.
Use 20% for savings
The 20% that remains needs to go into 401(k) account or to a Roth IRA and never to be touched for foreseeable future.
Always keep in mind that starting out with the 20% savings on these accounts will reduce the overall tax that you need to pay. Take advantage of this.
How Much To Save Every Month?
So this question of how much to save does not have a straightforward answer. There is no magic number. Commitments, responsibilities, lifestyle, and goals all play a huge role in determining how much to save every month.
Answer the following questions and you may get an idea of exactly how much to save every month.
1- How Much Time Do You Have Until Retirement?
When planning your retirement fund, it is especially important to consider how much time you have until retirement. The younger you are, the more time you have to build this fund. So, saving something like 15% would be a smart number. However, if you’ve found yourself in your 30s with little to no retirement savings, you’re going to have to play some catch-up.
This may mean saving a significantly higher portion of your income per year until you’ve caught up. And, the older you get, the more you should be saving anyway.
2- Do You Have An Emergency Fund Already Setup?
If not, then fill this bucket first. Stash away an emergency fund first before even starting your regular savings.
Ideally, your emergency fund should cover at least three months of essential expenses.
Having an emergency account will protect you from going into debt should an emergency show up. If you are already struggling to pay the bills, an unexpected expense can make that harder.
To avoid setting yourself back a step, it’s essential to have a fund of money to pay for these unexpected expenses. That way, you don’t have to worry about using your rent money or car payment money on an emergency. A pricey car repair or a setback in your career can happen at any time.
Find a way to fit emergency fund savings into your budget. Don’t think of this as an account to take money from when you’re behind on bills, but instead a “last resort” account.
3- What Are Your Goals?
Wanting to have a specific number saved up can be a little bit too simple for most of us. If you have no specific goals in mind, then save just for your retirement. However, if your short-term savings goal is to buy your first home, the easiest way to do this is to prioritize where your money is going.
And even with these short-term goals in mind, it’s important to remember how your savings will impact your future. Thinking ahead for things are also key to maximizing your savings. Though it may seem far away, saving for retirement and building an emergency savings account is important.
4- Can You Curb Your Wants And Luxuries?
There are so many strategies to save money. Sadly, you won’t be able to save any of your income if you don’t have healthy spending habits. The fundamental thought process that is needed to build healthy money habits is to remember that saving money is a priority.
Start to think about what you consider an essential versus what you consider an extra when it comes to your budget. Only you can determine what is essential to your life. Some people may see getting a massage an absolute luxury. However, others may see it as essential, as it helps their physical health.
You need to be honest with yourself, though. Remember that just because you love something does not make it essential. If you’ve found yourself in the bad habit of spending too much money on luxury items, challenge yourself to invest that money instead.
One of the most beneficial and simple habits to build is to keep track of everything. Start checking your transaction history on a regular basis. Having to look at exactly what you’re spending money on can help you think about if that spending is worth it.
Budgeting apps can make this even easier. Apps like Mint will automatically divide your purchases by categories. This way you can see exactly where your money is going. You can also use these apps to set budgets for each category. Maybe you’ve recently realized that you spend $100 on coffee each month. Mint will allow you to set a budget, like, say, $20. Every time you buy a coffee, you’ll notice your progress bar getting closer and closer to that budget.
Being able to visualize your spending is the perfect reminder to keep your goals in mind.
5- Have You Considered an Extra Stream of Income?
Regardless of how happy you are with your current salary from what is likely your full-time job, it’s always possible to earn even more.
T. Harv Eker, author of Secrets of Millionaire Mind once said:
“Rich people focus on opportunities. Poor people focus on obstacles.”
You may not be rich but having a mindset that focuses on opportunities can help get you closer to your goals. The idea of having a “side hustle” has been increasingly popular, especially for young millennials.
Do you find yourself with any amount of extra time that you feel could be better used towards making some extra cash? Consider looking at the skills and passions that you have, and use them towards finding your own side-hustle.
Some of these options are simple and easy to benefit from. Driving for ride-sharing apps, like Lyft, Uber, or even UberEATS, require very little background knowledge or experience. Other options, like dog walking or tutoring, can make you even more money if you have the right skill set.
A side hustle can be a lot of work. While the extra money is good, many people just don’t have the time to do it. A full-time job can mean that your time is already filled. This is where looking at passive income streams can be handy.
This is the income that generates regularly, with little maintenance. Most ways of generating passive income require quite a bit of work upfront. Once you’ve done the work, though, you can sit back, relax, and watch your bank account increase.
There are hundreds of options for generating passive income if you know how to sell your skills. Good at writing? Write an informative e-book and publish it on Amazon. You can make royalties from it for years if you get a good buzz.
There are plenty of other options, including drop-shipping, blogging, affiliate marketing, and real-estate investments. Even if you don’t see your side-hustle as a long-term commitment, it doesn’t mean you aren’t benefiting.
Finding another income stream can mean enough money to cover Christmas gifts, a much-needed vacation, or even being able to retire a whole year earlier.
6- Should I Always Save Between 15% to 20% Every Month?
The simple answer? Of course not!
Many people will often end up using their entire paycheck on entertainment, food, clothes, and shelter. For most of us, this has become a typical spending routine. After all, your needs have to be met before you can even think about saving. But, we can all agree that this is not the best habit to have formed.
No matter how much you are making, you should not feel discouraged from putting money aside into savings. If you are new to the savings game, it can be scary to feel like your money is “disappearing” into an account that you won’t be able to touch. You can make this impact a little easier by starting at a smaller percentage.
So, if you’ve never saved money before, you don’t need to feel pressured to immediately begin saving 20% this month. Start with something small, like 5%. Once you start putting money aside, you will slowly become more comfortable with where the money is going. Remind yourself that it may not be accessible now, but it will help you down the road.
Maybe by next month, you’ll be comfortable with 6% going straight to savings. Work your way up to that 20% at a pace that works well with your lifestyle.
Saving Through Investing
We all work hard for our money and our savings. But, once we’ve gotten a little bit of extra savings, we can let the money do some of the work for us.
Importance of Saving Money From A Young Age
One of the best parts about being young is how much time you have. Growing the mentality of, “I am young, so I have time to save up,” is the right mindset to learn. Many people think that because they are young, they can just put it all off.
But the younger you are, the more room and time your money has to grow. Start thinking about your age as an advantage to making money, not a reason to put it off.
The Power Of Compound Interest
Compound interest is pure magic!
Earning interest on interest over “n” number of compounding periods – doesn’t it sound magical?
It is like having your savings on STEROIDS!
You need to have time on your side in order to fully reap the benefits of this magic though. This is why it is crucial that saving money should be a priority from an early age.
Compound interest takes advantage of the time that your money sits in a bank. Over time, you’ll earn more money in interest. And not just on the initial principal amount but on the interest earned as well.
Example: 5% Return On 5 Year Investment
Compound interest makes money off your initial deposit, but also makes even more based on how much that initial deposit has made. So, imagine you invest $1000. With an interest rate of 5%, you would make $50 a year, giving you $250 additional interest after five years. However, if you compound this money, you will earn interest for the entirety of the amount after the yearly interest has been gained. So, when compounded, you can turn that interest into $276 if compounded yearly, and even more, if compounding is done monthly.
Take the time to look at all of the investments and savings accounts that you already have. Are they being compounded? And how often?
When it’s your investment on the line, making sure that their interest is being compounded, and how often, will make a big difference. That extra money may not seem like a lot when you start your savings journey.
Don’t think of it as “just $1000” but also take into account the ripple effects this $1000 will make in the future.
Your emergency savings can be compounded. Your investments can be compounded. So, you won’t just be dealing with “just $1000”.
Check out this online compound interest calculator from NerdWallet to help you decide the best route for your money. You should also be checking up on how much interest you’ve accumulated over the years, and make sure your money is working hard to make even more.
A healthy habit to have can be to challenge yourself financially on a regular basis. Start to get into the habit of bringing your lunch to work as often as you can. Once you’ve done this, you can challenge yourself to start meal prepping for an entire week to save even more. This can also get rid of any temptations to be lazy and order out for lunch.
Other healthy habits to develop can be to save any additional income. This can be a new tax return or a surprise bonus. It can be tempting to spend unexpected money. But if you’re already in the habit of immediately transferring that extra income into a high-yield savings account, you won’t even think about what you would have done with it otherwise.
Take a good look at your financial goals and ask yourself where you want to be in five years. And then, ask yourself where you want to be in 30 years. When it comes to smart investment and savings, you can’t just think about the present you. You’ll be thanking yourself when its time to retire, and you have plenty of wealth to fall back on that’s accumulated through years of saving.
“Fortunate sides with him who dares,” as the ancient poet, Virgil, once said. So, be daring and willing to change your financial path to one that maximizes your savings and your success.
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