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How To Get A Grip On Your Savings

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The tri-lateral relationship between income, spending and savings is important when considering how to get a grip on your savings. Theoretically, an increase in savings comes from two avenues: through an increase in income or decrease in spending. A recent American survey showed that about 69% of American have less than $1000 saved in the bank.  Similar figures were found in a GoCompare survey which showed that over 50% of UK residents have less than £1000 in savings.

 

These statistics point to the fact that the saving problem is largely caused by spending, regardless of income levels. More than income or investment returns, personal savings is the biggest factor in building financial security, however saving money seems to be quite difficult for a lot of people.

 

Harvard economics professor, Sendhil Mullainathan, said “why saving is so hard has less to do with self-control and more to do with a scale of city of attention. The psychology of scarcity engrosses us in only our present needs.” Scarcity of attention leads us to focus heavily on immediate problems, limiting the scope of our attention to the present. This is an issue because it can lead to unconscious spending sprees which act against our financial goals and long term interests.

 

 “Get a grip”

 

Don’t let the urgent overcome the important. Overcoming this psychological trap is key to your savings because the entire concept of saving is based on accumulating wealth for the future. To overcome this trap, your focus must be on what exactly you are saving for. When you have a clear goal in mind, you can then develop a saving system to achieve that goal.

Financial discipline is an important element for successful saving. If the amount you spend is more than what you earn then it is impossible to save. Regardless of your level of income, discipline and effective action are required for you to save money; today I have highlighted three simple steps to help you take action and get a grip on your savings:

 

 

Step One – Develop a saving plan

The purpose of your saving plan is to find out how much you can set apart and stick to on a regular basis. However, before developing this plan, you have to be sure of why you want to save. You could be saving to go for a trip, to buy a new car or just for security reasons but there has to be a reason why you want to save. Without a reason, your saving plan won’t last.

 

Now that you know exactly why you want to save, its time to come up with a plan. These are the steps to develop a saving plan:

  • First, assess how much you make on a periodic basis (weekly or monthly). Get a full picture of how much money comes into your account from time to time.

 

  • The second step is to assess your spending; spending includes everything from payment of bills to general upkeep. Here you ask the question: “How much money leaves my account during this period?”

 

  • The final part of this plan is to determine how much you want to put aside based on your earlier assessments, to determine your saving rate. The ideal saving rate is20% of your income and this is based on the popular personal finance rule, the 50/30/20 rule by U.S. Senator Elizabeth Warren.

 

The 50/30/20 rule simply states that:

  • 50% of your income should go to necessities like rent, bills and groceries.
  • 30% of your income should go to non-essentials, things you want but don’t necessarily need like going out for dinner or watching a movie.
  • 20% of your income should go to savings and debt, this includes emergency fund savings and any debt you owe.

 

The 50/30/20 rule provides a simple and clear strategy on how you can save without having to constantly focus on budgeting and penny-pinching. However, saving 20% of your income may be unrealistic for you especially if your necessary expenses take up more than 50% of your income. You can start by saving 10% of your income and then work your way up, the key here is for you to take action and use a saving plan that you can both follow consistently and build on. The higher your saving rate, the better for you.

 

Remember that this is your personal saving plan and it depends on your specific goals, your saving rate must be a realistic number for you to save long enough to achieve your goals;consistency leads to successful savings. You should also document your saving plan clearly so that you can see and reference it from time to time.

 

 

Step Two – Pay yourself before others

Now that you have decided on an amount to save, the next step is to pay yourself first. Your savings must be set aside as soon as money comes into your accountand not after spending has already begun. Think of it as paying your future self before you start paying your bills or shopping.

Your savings should be sent to a separate savings account to ensure that it is out of your focus. If possible, automate this process at your bank by speaking to your bank officer about setting up a standing order between your current and savings account. This way you don’t even have to think about the process, out of sight, out of mind. Your lifestyle will adjust to the money you have left.

 

 

Step Three – TRACK TRACK TRACK

We live in a consumer driven world, where you are incentivised to spend your money but how much of your hard-earned money is actually being put to good use? Noting down and tracking your spending will not only show you how much you are spending but what exactly the money is being spent on. This allows you to cut down on any bad habits that you might have and not even be aware of.  You have to track your spending; what gets measured gets managed.

 

After every transaction, note down what you spent money on and the amount you spent; doing this will enable you to track your spending periodically. There are also apps like Daily Budget (Apple users) andSaving Made Simple (Android users) to help you track your spending and offer visual representations of your finances.

 

At the end of the week or month, take time out to analyse your spending. Look at where you’ve spent the most money and ask yourself: “Is this getting me closer to my financial goal?”. If your answer is no then you should think about optimising and reducing your spending.

You can reduce spending through minor activities that accumulate over time. For instance, you can reduce how much you spend on lunch at work by packing lunch from home or you can tell yourself that there’s rice at home instead of going out for dinner.  These decisions to cut down on spending here and there will pay off in the long-run.

 

 

We’re all in different places with money. Start right where you are and build to get to where you want to be. Knowing how to save is just 20% of the process. Lifestyle changes and self-discipline make up the other 80%. You can do it! Just follow the steps.

 

“Financial fitness, like physical fitness, is mostly about good habits.” –  Laura Shin.

 

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