Tips and Tricks on How you can minimise your expenditure and increase your savings. We all know we have to save, be it for retirement, a large item such as a house, or even a holiday. But why does it have to be so hard?
Introduction to successful saving
Saving normally refers to the task of putting money away regularly, normally timed with your salary. Your savings can be used to invest with (see our tips on Investments) or purchase a large item like a house.
So, what is it that allows some people to achieve their saving goals, while others struggle? In my opinion, It’s not luck, nor is it even about income.
The first and most important observation is that reaching your saving goals is a journey. A journey of incremental steps. It will be a long and, at times, difficult journey, but, ultimately, achieving a savings goal is a very rewarding one, both financially and personally.
To make the journey easier for yourself you need to formulate a savings plan.
You need a plan
The keys to successful saving are to have and follow a savings plan.
Why? Because planning is one of the universal secrets to being successful at absolutely anything, whether it’s successful in your career, cooking a meal, or your financial wealth. You need your plane to be specific, here are the things that your savings plan will help you with.
- Setting specific financial goals.
- Ensuring that your financial goals are tangible, achievable goals
- How you are going to Measure your achievements
- Measure how far you’ve gone and how far you have to go
The components of your savings plan should answer the following questions:
- What are your savings goals: What is it your actually saving for?
- What is the timeframe for achieving your goals?
- How much do you need to save?
- What actions do you need to take in order to achieve your goals?
What is your saving goal?
The first step in developing your savings plan is to identify your financial goals. These goals will be the core of your plan. They could take the form of a trip overseas, a new car, financial independence, or even all three – it’s up to you to decide.
Take some time to identify your financial goals. And it is ok to dream a little.
Think about personal savings goals and think about the goals you want to achieve with your partner and family. Achieving shared savings goals is a great relationship strengthener.
Once you’ve figured out your goals, write them down (or if you’re like me put them in a spreadsheet).
A saving goal can be a few things. It can be a goal to save up for a certain item or purchase or a savings target itself. Whatever your savings goal is, it has to be specific.
For a goal to be specific, it needs to be well-defined. Say you want to save $15,000 for the purchase of a new car. Not only does your saving goal need to be well-defined, but it also needs to have a time constraint attach to it.
You need to understand the timing of your goals. It’s useful to have different goals with varying time frames. If you’re trying to achieve a long-term goal, there’s nothing more motivating than achieving a short-term goal. And be realistic about your time frames.
I want to save $20,000 to invest with by the end of the year.
This savings goal has both a well-defined target, $20,000, and a well-defined time frame, by the end of the year.
Once you have your saving goal sorted, you can reverse engineer it.
There are four months left until the end of the year. That give you 8 paychecks if you are being paid fortnightly. So at each paycheck, you need to set aside $2,500 into a savings account to achieve this.
Once you have reverse engineer it, you can work out the third aspect of a goal. Is it achievable?
Trying to save $2500 every paycheck sounds unachievable unless you earn north of $65k per year and your expenses are meagre. So you need to go back to your original goal and adjust either the amount you want to save or the time frame over which you hope to achieve your goal.
That is the basics of setting a savings goal.
- Set a savings goal
- Work out the time frame over which to achieve the goal.
- Reverse engineer, it to see workout if it is achievable
Once you have set your goal and reverse engineered a payment scheme, all you need to do is stick to it. To help you stick to your payment scheme, I recommend using a trick called paying yourself first.
Pay yourself first
When it comes to saving, there is one rule you need to follow to reach your goal. That rule is to pay yourself first. Paying yourself first make saving for anything an automated process.
Every time your paycheck comes in, you schedule a fund transfer to transfer the money into a savings account.
Automatically transferring money just after you get paid is the easiest way to keep on track. This is because you can’t spend the money as it is already put towards your savings goal.
But what If I can’t afford to save
Ok, so you know have a savings goal. And you have reversed engineered it to see how much you need to pay yourself first to achieve this goal. You find out that you can’t afford to achieve the goal.
Now there are three things that you can do.
First, you can go back to your savings goal and extend the timeline, which reduces the amount you need to pay yourself first. This comes with the bonus of paying yourself less but increasing the time to achieve your goal.
This is the easiest thing you can do. It requires a little effort. But I would also say that if you choose this option, you don’t have enough drive to achieve your savings goal. It must not be that important to you if you are not willing to do the work to achieve it.
Secondly, you can sacrifice towards your goal. Identify ways to reduce your weekly expenditure. Could you walk/bike to work instead of driving, saving on travelling costs?
How about asking your employer about flexible hours so that you could work 4 longer days, rather than 5. Saving an entire day of travel expenses.
Cut back on food expenses for a while? Food is one of the largest expenses for most people. There is often room to improve spending.
Thirdly, you could increase your income. People often find this to be the most difficult option to reach their savings goal. Often it is easier to lower expenses than to increase income.
Do you have a spare room in your house? Could you rent it out? Could you offer your services to other people- if you are an expert in an area you can often sell this expertise to others?
There are many ways you can increase your income, you just have to be willing to think outside the box.
There is more than one way of saving
The method of setting a savings goal, reverse engineering it, and paying yourself first is a great way to achieve your savings goals. But it isn’t the only way.
You could save more randomly. Finding extra cash here and there to save with. Or you could round your spending. Some banks offer this option. Where every time you spend, the bank will round your purchase up and save the difference.
Some general tips for successful saving
- Pay off your debt first – Your financial advisor may not suggest this to you as commissions often pay them. So they try to sell your investment vehicles instead. But seriously, you should pay off any bad debt that you have.
- Once you’re debt-free, stay debt-free – There is no point slogging away to pay off your bad debt, and then get back into bad debt a few months later.
- Start saving something, anything, and start today. Even if you can only save a few dollars each week, you’ll start to learn the habit of saving. And the longer your savings period, the better. The best time to save is 20 years ago; the second-best time is today.
- Keep saving. Saving is a journey, not a race. This journey will probably continue until you retire.
- Becoming a successful saver is a lifestyle change. It will require discipline and sacrifice.
- Look for an investment that will let you drip-feed your savings. This will help provide a form of discipline, and your investment will also benefit from dollar-cost averaging.
- Don’t wait for the next pay increase. Despite your best intentions, there will always be something else to spend it on. In general, increased income inevitably equals to increased spending. “Successful saving is not about how much you earn; it’s about how much you save”.
- Once you’ve started to save, invest it to avoid temptation unless you are saving for a specific purchase.
- Make a savings plan- what’s it for? When do you need it? How much do you need and how are you going to get there? Set a goal, reverse engineer it, set up a payment. And write the goal down.
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