How You Can Start Saving Too
You might be telling yourself something along the lines of I’m hardly getting by, I’m in no position to put away money right now. And I can relate, especially when it’s hard to see the value in stashing away a bit of money with hardly any returns, for an abstract purpose. But getting started saving, even if it’s a symbolic amount, will give you a sense of responsibility and control, and will help you build a habit and eventually have a significant impact on your finances.
On the other hand, if you already know you could be putting away some, but haven’t been able to cut back on that unneeded spending, these tips might help you gain some perspective and motivation to start doing it.
Finally, if you are already saving, you can gain some insight and perhaps some more motivation to keep going.
First, understand why you need to save
To me, the number one reason to start saving is independence. If I have a few months of expenses saved up, I’m automatically a little less dependent on my job or my clients. These things are healthy for me, even when everything is going great, but especially when things go wrong.
The more obvious reason is security. If you have a sufficient savings account, a layoff or a slump in projects, while still being tough, will be a manageable situation and not a horrible crisis. You’ll have a few months to get back on your feet, and that is priceless.
The second and perhaps more controversial reason is career growth. I work mostly as a consultant/contractor/freelancer, and having some financial runway has allowed me to be more selective when taking on clients, which helps me be more satisfied with my work, and learn more. I might even be in an excellent position to take a pay cut to work on an exciting project that comes up.
Third, for people working regular jobs, consistently saving will give you a great picture of how much of your income you actually need, and this can give you great flexibility. You want a more fulfilling, but unfortunately lower-paying, job, maybe you can afford it. Want to switch careers, but starting over will mean a deep pay cut, perhaps you can manage. The key here is that regularly saving up is the only way to know this for sure.
Second, track your expenses
Down to the last penny (or at least dollar). I can’t stress this enough. Use my app, or one of my competitors (not really), a spreadsheet (why?) or pen and paper (please no). But make a daily habit out of going through your bank account and writing down everything you spend. If you’re not doing this, you probably don’t know how you are spending your money. Do it for a month, and you’ll believe me.
The first positive outcome of doing this is that you’ll get a good idea of how you’re spending, you’ll probably be surprised by some categories taking up much more of your monthly budget than you expected. I never thought I could blow so much money on eating out in a month. It turns out it’s not that hard.
The second (and to me most important) result is that you will automatically get more conscious of how you spend. Every time you have to decide between cooking or ordering in, or between walking or getting an Uber, you’ll consider how much you need the pricier option.
I encourage you to do this for a month, my web app makes it very easy, and I’m striving to make it easier every day.
Third, match your spending to your happiness
This is very personal, so I’ll give a simple personal example and let you figure this one out for yourself.
The category that hurts my savings the most is eating out. Whenever I’m feeling down or bored, I treat myself to a restaurant meal, usually nothing pricy, but eating out is unsurprisingly more expensive than cooking (and less healthy, but that’s another story). Sometimes I’m too tired to cook, so I order something. And sometimes it’s the weekend, and we’re celebrating something, and I go out to eat with my girlfriend or my friends.
At some point last year, this category took up a quarter of my expenses. I had never given this much thought, I knew I spent a good deal eating out, but I had no idea it was this significant. The truth is I enjoy eating out, but I’m sure it’s not as important for me as rent. After I found this, I’ve been learning to cook more and to enjoy cooking more, and have dialed this category down to around 10% of expenses. I’m not a single bit less happy because of it.
On another note, I already spend a fair amount of money on education, mostly online courses, and books, but I used to hold back much more. Now that I know how my expenses break down, I know I can afford to invest a bit more in my education without remorse.
Also, being a “digital nomad,” my expenses in the travel category are a bit bloated, but this is a part of my life I don’t want to change anytime soon, so I have learned to make peace with it taking up a sizable chunk of my hard-earned money.
Long story short, I now spend less on restaurants, more on education, and what I need to on travel, and that looks more like where I want to “buy a bit of happiness.”
Fourth, get insurance
This is a hard one because it depends on each person’s particular situation and risk tolerance. Still, the simple idea behind this is that it is not worth making the effort of saving if a single event might de-rail your plans. So keep that in mind.
Fifth, open a savings account
Keep this account as far from your day to day spending account as you can, if you can put it in another bank, do that. In most countries, you could have one set up by tomorrow. In the US, at least, you can get them to pay you a bit of interest, which would be ideal.
Keeping your day-to-day spending money separate from your savings will help you build a clear picture and will make the next step much easier.
Finally, pay yourself first
The oldest trick in the book. Once you have tracked your expenses for two or three months, you’ll probably have a good idea of how much of your paycheck you can put away. Now, instead of doing it at the end of the month, send that money to your savings account as soon as you get paid.
The standard rule of thumb advice is that you should keep three to six months of cash on hand for emergencies, once you have that put away, you can start organizing your savings.