No matter what stage of life you’re at, saving money and maintaining a strong personal balance sheet is imperative to financial security. It’s one of the primary reasons behind giving allowances to kids: not just to teach the relationship between work and money, but also to introduce the idea of long term planning in regards to money and finances. Without this conditioning in our early years, we are likely to become impulsive spenders as adults; and while this isn’t too problematic in most instances, the consequences of reaching the end of the month with little leftover savings in the bank can be rather detrimental to your personal (or family’s) financial stability, emotional health, and general happiness.
For me, having money isn’t about buying expensive, extravagant things, showing off, getting attention or impressing people. To me, money is about freedom – the freedom to do as I please, when I please. For example, if you have a full year’s savings at your disposal, you can be picky about which industry to work in or which company to work for, and choose a career you are passionate about. With savings, you’ll never have to worry about next month’s rent or mortgage, home and car repairs, medical bills, natural disasters, or credit card debt accumulating. You will always know that if life throws you a curveball, it may set you back temporarily, but it won’t financially cripple or bankrupt you. Like the saying goes, “money doesn’t buy happiness”, but the independence and empowerment you feel from financial stability will allow you the peace of mind to search for happiness in your life.
To avoid falling prey to the “living at my means” mindset (as opposed to living below your means), charting a course for your financial future that includes a steady savings plan is your best bet.
One Size Doesn’t Fit All
So-called finance experts generally advocate a 10% savings rate, which means you save ten percent of your gross income on a month-to-month basis. While this sounds ideal, it’s simply not a realistic figure for some people and leads them to give up in frustration because saving doesn’t seem “worth it” if it’s just in pennies and nickels as opposed to hundreds of dollars per month.
But the key to success is starting small, whether it’s keeping a coin jar at home or tucking away a few dollars from your paycheck each pay period. One of the easiest methods to save money fast is to save unexpected income or cash, such as end-of-year bonuses, unusually large commission checks, and birthday, graduation or wedding gifts.
If impulsive spending is a problem, you may even arrange for a given sum of money to be automatically deducted from your checking account and diverted to your savings account. Warren Buffett has two great quotes applicable to spending and saving.
- On spending: “If you buy things you do not need, soon you will have to sell things you need.”
- On savings: “Do not save what is left after spending, but spend what is left after saving.”
Working your way up to the 10% (and beyond) threshold will take patience and a willingness to make some minor spending cutbacks. However, do not feel compelled to follow every savings guideline out there; instead, find what approach works best for you and set your goals accordingly.
How Much To Save?
The answer to this depends primarily on two factors: how much you’re currently making (as well as how much of that income is disposable and not spent on living expenses) and what items you’re saving for. The dollar amount saved will depend on your financial situation, though after an initial period of getting used to the idea of setting aside money on a regular basis, how much you save will be a percentage of your income. For some, this may be a meager 1%. That’s a good start, but the best-case scenario would be to save at least 10-20% of your overall income or more if your income is increasing significantly while your expenses remain low comparatively. This may require a lifestyle change – downsizing, prioritizing debt payments, buying “lesser brands,” etc. – but the long-term benefits are indisputable.
Before you even consider saving for traveling or retirement, you need emergency savings. With the economy slowly improving since 2008, we’ve seen multiple instances where an emergency savings would have benefited families tremendously: unexpected unemployment, reduced hours/wages/benefits, defaulting on the mortgage/home foreclosure, not enough money saved for your children’s education, mounting credit card debt just to cover daily living expenses, natural disasters such as hurricanes, etc. Almost nobody is 100% immune to these potential circumstances, and while they’re unlikely to happen, having an emergency fund can shield you from most of the negative impacts. Ideally, you would have six months’ worth of expenses (according to your non-discretionary budget or living expenses) saved off to the side, ready to use in case of emergency. However, many Americans don’t have more than a month or two set aside in an emergency fund (if they have such a fund or savings at all). The main reason for not having an emergency fund? “I’m barely making it by as it is.”
No matter what your budget is, there is undoubtedly a little wiggle room that you can temporarily cut back on while building up a secure nest egg for that rare instance in which you need to cover monthly expenses without a steady income flowing. These expenses include loan and credit card payments, so be sure to include that in your calculations. Once you have at least three months worth of expenses saved up, you’re already ahead of the pack. Of course, don’t stop there – keep saving every month and eventually, you will have guaranteed your financial security. Imagine how much happier you will be in life when you don’t have to constantly worry about money.
Retirement savings is obviously a long and complicated topic – one that can’t be comprehensively discussed in one article, let alone a paragraph but we’ll offer a brief overview and tips. There are many different strategies to save for retirement, but all of them start with the idea that starting earlier is better. It may be difficult to plan for something 30 or 40 years down the line, but if you start saving as soon as you begin working, you will slowly but surely develop the habit and be smart with your money.
Begin by paying down all debt, from student loans to credit cards. Prioritize the highest interest rate debt. Then inquire about and research your employer’s retirement plans, such as profit-sharing, 401(k), IRAs, stock options, corporate pension funds, etc. If your income is limited, start by contributing to any retirement packages that include employer-matching, i.e. your employer will match and contribute, up to a certain percentage, the amount the employee participates in the plan. Can you say “free money”? In addition to helping you accumulate a nest egg for retirement, many of these options have tax advantages that lower your current taxable income and decrease liability, or allow your principle investment to grow tax-deferred in the long-run.
As your family’s cash flow grows, increase your savings, not your spending. Don’t be the surgeon, dentist, or lawyer who lives in a million dollar mansion, drives a Mercedes, goes to Europe twice a year, spends a year’s worth of college tuition on a private elementary school, and doesn’t know how they will ever retire.
Short-Term Versus Long-Term Thinking
As with anything in life, there are some extreme stances on the issue of personal finance, ranging from “scrimp and save everything” at one spectrum to the “you only live once” stance where every dollar ought to be used now because you may not be around to spend it tomorrow. Rather than hyper-saving or hyper-spending, let’s look at the situation at hand and determine how you can achieve balance in your financial situation while progressively adding more to savings.
After nondiscretionary items (mortgage payments or rent, utilities, rent, food, minimum payments on credit cards or loans, etc.), how much do you currently have leftover? If you have 5-10% or more of your after-tax income left at the end of each month, where is that money currently being directed? Are you saving or spending it on discretionary items, such as partying, clubs, alcohol, movies, restaurants, tech gadgets, and gaming? There is nothing wrong with spending on entertainment (similar to dieters allowing themselves to “cheat” every once in a while with some chocolate or a cheeseburger), but when you’re looking to build up your financial safety net, it’s important to switch your focus from short-term fun to long-term security (and fun, if you’re saving for a big vacation or retirement).
Saving for the future is not as easy in practice as it is in theory. Sometimes, it feels like a New Years’ resolution: something inspires you to change your spending and saving habits for the better and you’re steadfastly resolved to start saving X per month. But after a while, that initial excitement starts to wane and it becomes a drag to cut back on certain expenses like Hulu or Netflix, a beer everyday after work, a massage, a weekly manicure/pedicure or the gym membership you never use. How you handle this plateau will determine how successful you’ll ultimately be in reaching your next savings goal (there should always be multiple goals, which will maintain a certain level of motivation to continue saving).
So what are you saving for, anyway? Retirement? Education for your children? A vacation? A home? We all have different wants, and some should be prioritized over others (for example, saving up for the down payment on a home in your twenties or thirties is likely more of a priority than saving for retirement). Ultimately, each category should have its own allocated amount to ensure financial security on every level of your life. The only way to get there is through patient budgeting and the willingness to make short-term sacrifices for long-term rewards. Check out our article on the “latte factor” for more insight on short vs. long term rewards.