Saving money is a pillar of developing your long-term financial security. Simply put, saving more money than you spend is the key to becoming wealthier. While the principle sounds simple, in practice many people, regardless of their income levels, struggle with making the right financial decisions so that they save appropriate amounts of money over time. Saving can be difficult today because expenses can be difficult to anticipate, and merchants do everything they can to make it easy for you to spend your hard earned dollar. To be successful over the long run, you need a plan to keep you on the right path. In this guide to money saving, we will look at what you need to succeed and how to manage some of the common obstacles to saving money.
Why is it important to start saving money today?
Building wealth is important, but do you need to start doing it right away? The answer is definitely – yes! Something that is seldom considered in money and finances is the value of time. Properly managed, a surplus of wealth can grow all by itself, through the power of compound interest. If you consistently focus on creating a surplus and contributing that surplus to financial assets that will grow your money over time, your money will grow like a “snowball” picking up size as it rolls downhill. Done successfully, this constantly growing money could eventually start creating enough wealth on its own to cover much, if not all of your life expenses. It’s not an impossible dream, and it should be your goal to have such financial security by the time you reach retirement age.
On the other hand, time can also be your enemy if not used properly. Consistently spending more than you are taking in, even by a little, will prevent your finances from ever picking up steam, and will slowly erode your personal wealth. If you squander your prime earnings years as an adult, you’ll find yourself in a tough place financially when you near retirement age, and don’t have enough money saved up. This may mean working longer than desired, or having a lower standard of living in retirement.
Take advantage of whatever time you have now, and start building your financial snowball!
Your Ultimate Money Savings Plan:
Step 1: Set Your Goals
The first step in any great money saving plan is to make sure you have clear goals that you are trying to reach. With regards to saving and financial planning, there are several possible goals that you could save for, but we’ll cover the most important ones here. All recommendations here are minimum level goals. If you choose to exceed these goals, it just means that you may be able to reach an end goal more quickly and comfortably.
The most common savings target is retirement savings. It’s generally advised that in order to retire on time at a level of financial comfort that allows you to maintain your lifestyle into retirement, you should be saving 10% to 15% of your pretax income, including employer contributions. This is a good general rule of thumb. If you would prefer to shoot for a concrete end number and work backwards, you’ll need some tools to calculate how much money you need in retirement funds by the time you reach the proper age. Trust Point’s retirement calculator allows you to calculate the potential retirement savings for you and/or for you and your spouse combined. Other features include allowing you to estimate how much money you’ll need in retirement, your rate of return during and after retirement, your retirement savings and contributions, your company match, and more. To use the retirement calculator, login to your account here and choose “Plan” from the toolbar at the top of your account dashboard.
Other calculators can be found online and can give an estimate based on details you provide:
The next most important pillar of savings should be an “emergency” fund. An emergency fund is important to have in place because it protects you from having to take drastic financial steps if something goes wrong in your life. Imagine scenarios such as losing a job, having an illness that creates significant medical expenses, uninsured damage costs to an important piece of property such as your home or vehicle, or costly legal expenses. It’s generally advised that you should have, at minimum, a three month reserve of cash in an easily accessible account, such as savings or checking, that can cover all regularly occurring expenses such as mortgage or rent, groceries, utilities, and loans. Many financial professionals believe this is the bare minimum, and most people should have as much as six months of reserves available.
Discretionary savings should be your final savings consideration. Here is where you will have the most latitude, but it’s important to have a portion of your income that can flex to whatever goals you desire. Perhaps you’re saving for a new car? Do you anticipate making a major renovation to your house in the future? Do you want to work on growing your own personal investments to start accumulating wealth outside of your job? Having discretionary savings is a good sign that you have a healthy financial life, because it will mean you have ticked off the major necessities in securing your retirement and building emergency funds. You should strive to have 10% of your pretax income in this category.
Step 2: Make A Budget
In order to set a savings plan you’re going to need to take a close look at your income and spending. You will need to take the time to sit down and draw up a budget that details all of your current income along with weekly, monthly, and yearly expenses. If this sounds too daunting to you, then schedule some time with a financial professional, such as Trust Point, to help walk you through this process. A good budget will provide you with an accurate picture of how much money you have available to save, and how you will need to manage your discretionary spending in order to hit the saving goals detailed earlier. The budget should answer a few simple questions up front:
- How much money are you currently saving?
- How much is going to retirement savings?
- What percentage of your spending and income is dedicated to housing?
- How much of your income is going to paying off long term debt, such as student loans?
- How are you planning to pay for yearly or bi-yearly expenses such as car insurance, and annual subscriptions (ex: Amazon Prime Membership)?
- How much do you normally spend on healthcare each year?
- How much flexible or discretionary income do you have left over, once all expenses are accounted for?
The last question is key to understand before you start your money saving plan. Once you know how much money you can save, then you can make a commitment to how much money you will save.
Step 3: Set-up Your Accounts
With solid goals and a budget in hand, you can start putting together the mechanics of a savings plan that will work for you. Start by setting up accounts, so that you can park your money in places that have dedicated uses. At minimum you should set up a checking account, a savings account, and establish one Investment Retirement Account (IRA). The financial institutions you choose are up to you, as there are many variables to consider based on where you live and your financial situation. It may benefit you to have multiples of the same types of accounts, as long as you can keep track of them and avoid costly banking fees.
Get as many as you need, but keep it as simple as you can manage. The reason you may want multiple checking and savings accounts is that it can help you allocate your money instead of looking at one large checking account and guessing as to whether or not you have enough money to make it through the month. It can be helpful to set aside one account for all the regularly occurring bills you have such as house and car payments, student loans, utilities, cell phone and internet bills. Another account can be dedicated to discretionary spending, where you allow yourself latitude to do what you want, and the expenses can be more variable. Most importantly, don’t forget to set aside a “savings account” that may be the place that you dedicate your hard earned savings. An IRA can be a good place for this money because the contributions can grow tax free, and you are allowed to withdraw the original contributions without penalty. If you don’t like some of the limits of the IRA, then additional saving accounts will work.
Step 4: Make Saving Automatic
Now comes the easy part. When you have goals, budgets and accounts lined up all you need to do is automate the process to start saving money right away. With today’s banking and payroll, most money can be moved and distributed automatically without having to take any actions of your own. Many employers allow for ACH deposits to multiple accounts. In an ideal scenario, you can simply have your paycheck distributed between your accounts for regular bills and spending, discretionary spending, and savings.
Studies have shown that automating your savings in this way has the greatest likelihood of maintaining a habit of saving over the long term. If your employer can’t split up your paycheck for you, have the whole thing deposited to a single account and then set-up recurring auto transfers to the other accounts. Most banks have no limits on the amount of auto-transfers you can set-up, although there are often limits to the amount transfers you can make in a month from a savings account, so be aware of these details to avoid penalties and fees.
Automated savings is the most likely method for getting you on a regular saving path. Manually going into your accounts every month and transferring money can feel like a chore, and moreover you may mistakenly spend that money before you ever get a chance to save it. Automation takes this process out of your hands, and forces you to “pay yourself first” before you start spending money. If something important comes up that requires you to move some money into the discretionary pile, then make that the “manual” step. The key is to make saving money as easy as possible, and spending money over your budget more difficult.
Step 5: Get Your Debt Under Control
Debt payments can throw a wrench into this entire machine if not managed properly. Credit utilization is an important part of a healthy financial profile, however it can often get out of hand for even the best of us. Debt, especially consumer debt via credit cards, has a nasty habit of derailing the best budgets, because the high interest rates can quickly grow the amount you owe. Additionally, since credit purchases don’t show up right away as debits from your available funds, they can trick you into feeling like you have more money to spend than you actually do. If credit card debt is an issue for you, then you need to start getting a hold of it right away or all of your work saving will be negated. If you aren’t paying down your balance every month, then it’s time to put away the cards and create a budget to pay down the balance over time.
Once the balances are under control then you can use a method that works for managing your balance. Some best practices are:
- Set-up an automatic payment that pays off the balance each month
- Immediately schedule a payment to pay off the purchase you just made
- Choose one day every week to go in and pay off your balance in full
If any of those practices don’t seem viable for you, then credit card usage may be a problem, because you are clearly spending more money than your budget can afford, and you should consider stepping away from using your credit cards until you feel confident in your usage.
Step 6: Customize your savings plan. Stay on track!
It’s important that you tailor your savings plan based on the financial priorities in your life. How far along are you on retirement savings? How much do you have in your emergency fund? How do you balance different savings priorities? These are all important questions to consider before you set up your saving plan. You should also consider that your plan will have to be reviewed and adjusted periodically. It can be very helpful to have an objective third party take a look at your goals, budget, and savings to give you an assessment of how to work towards your long term goals. A Trust Point financial professional can be of great assistance to you in helping to create a plan and then make periodic check-ins to help keep you on track.
Trust Point is ready to help you get started today!
If you’re ready to begin your savings plan, then there’s no better time to get started than the present. It will take a little work, but will be well worth it for the security and peace of mind that you’re making progress toward your financial goals. If you need help with any of these steps along the way, our knowledgeable team members can assist. We’re enthusiastic about helping you achieve your future financial goals! Call us at 800-658-9474 or fill out our online contact us form.