We’re starting a series on how to save money and invest it into a balanced portfolio. This first article will cover how to start saving from your monthly paycheck.
The strategy is simple: spend less than you earn and save the difference. Easy, right? Well, it can be more challenging than it sounds.
Common tips found online for saving are “skip the coffee from the coffee shop in the morning and drink your coffee in the office.” Although it’s a good tip, the $100 saved monthly would not solve your retirement plan.
The first step in saving more money is knowing what you spend it on. The best option is CashControl (obviously), but a simple spreadsheet or even a notebook can get the job done. Define categories, plan a budget, and then enter all the expenses; track bills, incomes, loans, and everything else for a complete picture.
We bet you’ll have a few surprises after your first month compared to what you expected. Things like the morning coffee in the above example do add up; also, expenses you think of as rare are cumulatively happening every month. With the proper information, you can take action:
- reduce the number of takeouts you order,
- cancel services you forgot you have,
- change your shopping habits.
You should do whatever works for you, but be in control.
This doesn’t mean you can’t spoil yourself occasionally or buy expensive things. Still, you’ll have to make a conscious choice to do so and choose what is a priority for you.
If you love going to fancy restaurants, you can plan for that and do that once a month; if you like to watch movies at home, you can save and buy an expensive TV; if you love vacations, you can prioritize and spend extra on a nice one. But you must choose which ones are a priority, as you can’t do them all and still save money.
When you have a perfect understanding of your income & expenses, you can decide on percentages: for example, you’ll know that your base expenses (rent/mortgage, utilities, bills, food, clothing, etc.) are 50% of your income; you’ll then decide to have 20% for discretionary spending (save for vacations, restaurants, a new phone, etc.); the rest of 30% would go towards savings.
These percentages will adjust over time: when you get a raise, your base expense percentage will go down, and you can increase savings; when you have kids, your base expense percentage will go up while your discretionary spending goes down.
Another strategy some recommend is saving first and spending the rest. When you get your paycheck, you transfer the savings percentage into your savings account and spend the rest. Although simple, it still requires tracking your expenses; otherwise, you’ll frequently dip into your savings when “unexpected” expenses arise.
So, in conclusion, here are a few takeaways:
- Track your spending
- Save on the little things
- Make a plan on how much to spend and how much to save each month
- For discretionary spending, pick the things that give you the most joy and only spend on those
Next time, we’ll explain what to do with the money you save in order to prepare for a better future.