We all know by now that the only reason that we aren’t all rich is because most people spend more money than they make. Since you’re reading a personal finance blog, and I’m writing one, I think it’s safe to say that we don’t want to be the type of people that have steady paychecks but little to no savings (and mountains of debt). Saving money can be a painful process, but it really doesn’t need to be.
As a wage-earning adult there are a few things you should know about yourself before you try to save money. None of what I’m about to suggest to you is very abrasive. It’s all relatively easy as long as you take a few minutes each month to understand your finances. A lot of what I’m about to say is going to sound like a budget, but it’s not. I believe in the anti-budget and feel that real budgeting is as impossible as dieting.
You should have a general idea of the amount of money you make within a one-month period. If you’re a freelance employee, or you work on commission, it might be hard to figure out the exact amount you earn every month, but you should be able to come up with a decent average by basing this number off a “normal” month. Not the month where you had 1 billion sales and broke company records, and not the month where you had writer’s block and couldn’t get anything published. This isn’t really an issue for most people, because most people generally make the same amount every month, but surprisingly a lot of people don’t know what that amount is.
Whenever I talk about income I’m referring to the after-tax amount that hits your bank account.
Once you know how much you make you should calculate the amount you spend every month in fixed expenses (mortgage, rent, cell phone, utilities, car insurance etc). This information is important to know, because it equates to money that’s already spent. Most of the time you can reduce these costs, but focus first on figuring out the exact amount you’re being robbed by paying these bills every month.
When you subtract your fixed expenses from your income you’re left with discretionary money. This is the money you spend on stuff whether it’s lattes or a Netflix subscription. The problem is that most people are spending ALL of their discretionary money and then some, so they never contribute anything toward savings or retirement. You should be saving something, though, right?!
I would never tell someone to save money just to save money. How dumb would that be? That doesn’t really answer the question “Why should you save?” I’m obviously not you, so I don’t know what your plans are in life, but if you set financial goals it’s easier to achieve them than just deciding that you want to “be a millionaire” or something crazy like that. I would ask you “Why do you want to be a millionaire?” and “Just ’cause” isn’t a good enough response.
If you’re a total noob when it comes to saving you should start small. You’ll fail if you go from spending 120% of your income to only spending 20%. Gradual life modification is the only way to go. Set a manageable and realistic goal that you can achieve within the first 3 months of saving. That will give you confidence that you can actually accomplish something financially, and you’ll be able to increase the lofty-ness of your future goals.
Having a savings account titled “House down payment” and setting a time frame of when you want to have the account fully funded will give you the exact dollar amount that you’ll need to contribute every month to meet your goal by the “deadline”. The cool thing about this is that once your account hits the magic number, you may not be interested in whatever you were originally saving for and decide that you have bigger goals you’d rather tackle.
You may have realized by now that if you’re going to save anything it’s going to have to cut into your discretionary money. That’s just life, take it or leave it. You won’t have as much money every month to spend on Hair Gel or Girl Scout Cookies, but you shouldn’t try to completely change your lifestyle overnight or you’ll fail. Think: Small changes. If this is your first financial savings goal ever, you’re going to want to decide on a time-frame (I’m giving you 3 months), a dollar amount (No more than $500) and whatever the hell you actually want. A new cell phone? To buy yourself out of a cell phone contract? Whatever.
The next step (after you’ve decided your goal and time-frame) is to set up an automatic transfer from your checking account to your savings account for every time you get paid. I’ll use myself as an example: Let’s say I make $2,000 a month and I want to save $100 a month to buy a new lawnmower in 3 months. I would log into my bank account online (or if I was old-fashioned I’d call the bank) and set up a recurring transfer of $50 every pay period, since I’m paid twice a month. Doing this will make it so I don’t even have to think about the cost of the lawnmower. I know the money is moving itself magically, and when I look at the balance of my checking account I know that I can actually spend that money while my goal is accomplishing itself.
This is the basic idea behind the concept of “paying yourself first”.