In our year-long series, How To Develop A Spending Plan, we’ve talked about the in’s and out’s necessary to develop your spending plan for each month and how to set yourself up for success throughout the year. January we focused on specific action steps to take to start the year off right.
Now let’s talk about the next step in your spending plan, savings.
Just as it’s essential to make sure all of your expenses are covered and your debts are paid, it’s also important to look toward the future and set up a savings plan to give yourself some peace of mind.
There are various things you should be saving to make sure you’re covered, starting with an emergency fund for unexpected events.
You should also have a few months of your salary saved just in case something happens with your job, and you should have a plan for saving for retirement. Add to that smaller savings funds for things like vacations, Christmas, and getting a new car or any other financial goals you have.
All of this can seem like A LOT of saving. Don’t expect it to happen overnight. Especially if you haven’t done well at saving before.
But every little step in the right direction will get you on the path to financial success.
SET UP A SUCCESSFUL SPENDING PLAN – FEBRUARY
If you’re a new reader to A Mess Free Life, one of the things you might not realize is that we focus on the importance of fixing your life first and the natural consequence is your finances follow.
What this means is that we don’t encourage you to cut every single bit of fun from your life. Instead, we encourage you to find ways to continue to do the things that are important to you and meet your needs.
We do suggest you find cheap and free alternatives to things that may be pricier, but sometimes that’s not always possible.
For example, say you need to go to the gym because you love spin classes and you reap all the health benefits from going there. Would this be something that you would remove from your budget?
Not necessarily. It’s fueling your need to stay healthy, and it’s something you value.
Remember, keeping a tight budget doesn’t mean you can’t have fun. Just build it into your budget. Add a line item for date nights, family dinners out, or other fun activities you like to do. Budgeting for it will allow you to enjoy it without feeling guilty about how you should have spent that money instead.
KNOW YOUR GOALS
If you don’t know what you’re saving for, you won’t be motivated to save. You need to know your “why” so that you can connect with your goal and be committed to working toward it.
So why do you want to save? Did an unexpected expense throw you off track with months to recover and you don’t want to go through that again? Do you want to take your family on a beautiful vacation? Are you worried about how you’ll be able to manage in retirement and think you’ll somehow have to keep working? Maybe you want to make sure your kids graduate college without debt.
Whatever your reason, knowing why you want to start saving is the first step. Write down your goals and your why for each one so that you can look at it daily.
KNOW YOUR CURRENT SITUATION
You can’t make a path to where you’re going if you don’t know where you’re starting from.
If you’ve been working on creating a spending plan, you probably already have a good picture of your current financial situation. If not, it’s time to get real about your finances.
Review all of your monthly bills and debts, including the total amount you owe for each credit card and personal loan. Create a budget for how you will pay those each month based on your income.
Make sure there’s something left over because you want to add “saving” to your budget and make it a non-negotiable monthly expense. If your end result is a negative number, it’s time to look at cutting costs or getting a part-time job to increase your income.
CREATE A SAVINGS PLAN
The easiest way may be to work backward.
For instance, if you know you want to have $1,000 in your emergency fund, determine how many months you want to allow to reach that goal then divide those two numbers to figure out how much you need to save each month. Or, if you know that you can save $100 each month, you’ll already know it will take ten months to reach your goal.
Keep your goals realistic. If they’re too much of a stretch, you’ll find a way to avoid them each month, and nothing will change. Give yourself the opportunity to succeed in keeping your goals within reason. If your ultimate goal is to save $500 a month, but you think it’s a stretch, start with $100 a month and work yourself up.
AUTOMATE YOUR SAVINGS
Create an automatic transfer into your savings account each month, so you don’t have to worry about whether or not it’s being done. This will allow you to make your own needs a priority. Set it up once or twice a month on your pay day’s so you won’t even miss it.
Another way you can to save is to use a program like DIGIT.
I have been using DIGIT for over a year as a test to see what it’s like using a system that determines for you how much to save and then automatically deduct the amount and tucks it into a rainy day fund. And, I’m here to tell you, DIGIT works.
In the past year, I’ve saved over $2,500 without even thinking about it. This was on top of the regular savings that I set aside to my Capital One Account, and I didn’t miss a penny.
Most of us can save this $84 per month if we let DIGIT do its magic.
If $84 seems like too much, just put away what you can to start. Even building up your change jar or setting up your checking to round up debit card purchases and deposit the extra into savings (a service offered by many banks) can help you get to your goal by the end of the year.
MONITOR YOUR SPENDING
It’s easy for your spending to get out of control with impulse purchases or things you don’t need, like that $5 latte. Until you get in a regular habit of spending and saving, monitor your bank account daily or weekly to look at where your money is going and how much is going somewhere, it doesn’t need to be.
If you want to get an eye-opening view of your spending, consider daily tracking.
If I were to ask ten people if they liked tracking their expenses, maybe – maybe one person would raise their hand.
I get it; no one likes to track where their money went.
But here is what I know for sure:
Tracking your expenses automatically leads you to spend less money.
The purpose of tracking is to take a snapshot of your spending habits and figure out where it all goes. It is only by doing this you can begin to change your habits.
Track your spending and you’ll…
• Plug leaks in your spending
• Reduce spending
• See how reducing small amounts in lots of areas add up to something significant
• Begin to live within your means (and save)
• Know where your money is going
The first time you track your spending, try not to edit your spending habits. If you can, do this exercise for a month. At the end of the month add up, by category, what you spent during that month.
WATCH HOW YOU SPEND
If you don’t have the money in your bank account for a bill, it’s easy to just put it on your credit card and be done with it. But ultimately, it costs you more money because you now have interest fees to pay, and it’s putting you further in debt.
Before pulling out the credit card, think before you spend.
You may want to try using the envelope method to help you learn how to work within your budget. Put the amount of cash allotted for each line item into an envelope and only use that envelope to pay for that expense. When it’s gone, it’s gone. This will help you to be more conscious of your spending.
LEARN FROM MISTAKES
Mistakes happen, it’s part of the learning process. When they do, don’t ignore them.
Instead, think about where you went wrong and what you can change in the future. Work to recover from your mistake as quickly as possible so you can get back on track. If you’re not sure how to recover or want to avoid mistakes altogether, read books and articles about financial growth and savings so that you can learn from other people’s mistakes.
Saving is a healthy part of any spending plan.
When you take the time to think about your saving and spending from the perspective of what you value it becomes easy to make the right choices and to curb unnecessary spending on frivolous items that don’t meet your needs.
Take your goals and use it to fuel the right plan. Monitor and evaluate your spending and don’t forget to automate your savings to make it as seamless as possible.
Make it a priority so that you can start to see your financial picture improve.