Saving money is a lot like a romance novel. Everything is new and exciting in the beginning as you implement your new found saving habits. You start to see your debt levels drop and your wealth accumulate and you wonder how you ever lived without your savings account in your life.
However, this high is short lived.
The honey moon phase of your saving habits usually ends when the first real financial hurdle hits. This could be a graduation trip planned with friends, buying gifts during the Holiday season, or any number of reasons that would cause your monthly expenses to increase. Regardless of what this hurdle is, you have experienced added financial stress. In these instances, we tend to dip into our savings account to cover these expenses, yet we rarely ever make the appropriate re-contribution to our accounts. To make matters worse, we also lose out on any benefits from compound interest on the funds that we withdrew. In the short term, these withdrawals may not seem like a big deal. However many of us are creatures of habit, and reaching into our savings when things get tight can soon become a much more difficult obstacle to overcome when trying to save for the larger expenses in life such as your first home, your children’s education, and retirement.
Now don’t lose faith, every love story has a happy ending, we can thank Nicholas Sparks for that.
In any good romance story the main characters are separated for some time and it seems as if things just won’t work out. Similar to how many of us feel about our savings accounts. However, eventually the main characters reconnect, rekindle their love, and living happily ever after. The good news is you can rekindle the flame with your savings plan and live life with greater financial comfort.
Build a Budget
The first step to attaining financial comfort is building a budget. In order to increase your savings you need to spend less than you earn. Seems simple, but with our access today to high interest credit cards has made this increasingly more difficult. Earning more than you spend will allow you to accumulate more personal assets than liabilities which will provide you with greater financial security in the future.
The first step in building a budget is to know your monthly income. The goal of a budget is to allocate this income in a way that lets you cover your expenses but also generate monthly savings. Now, the first thing you do with your budget is pay yourself. That’s right, take whatever percentage of your income that you would like to save a pay yourself. This money can be used to pay down any outstanding debt and then invested over the long-term to increase your wealth. The difficult part is maintaining a consistent level of saving. Try starting by saving 10% of your income, as you gain more confidence in sticking with your budget you can begin to increase this percentage. A strong near-term savings goal is to be comfortable saving about 15% of your income.
Next, you’ll want to break down your monthly expenses. This includes items such as rent, insurance, utilities, groceries, and other monthly bills such as your phone and internet. You’ll also want to note any annual expenses. For these cases, divide the annual payment by twelve so that you can adequately save for this payment each month.
Another important part of your budget to think about are the small monthly expenditures that many of us categorize under miscellaneous. These include monthly fees for gym memberships, Netflix and other monthly subscriptions. Upon sign-up the cost of each of these subscription may seem minimal, however since most of them are charged directly to our accounts that can easily go unnoticed. Furthermore, many of these monthly subscriptions require sign-up with a credit card. This results in a larger credit card balance which causes increased interest cost if not paid down in time.
You’ll want to be sure you include transportation costs in your budget such as gas for your car or a public transit pass. Another item that is crucial in ensuring that you do not withdrawal from your long-term savings when hit by financial hurdles is a rainy day fund. Budget-in a small amount, whatever you can afford, to contribute to a rainy day fund that will cover surprise costs such as an unexpected vehicle repair.
You can also budget-in entertainment. This will allow you to go out for dinner, attend a sporting event or concert, or check out a couple movies within the month without hurting your savings. Finally, you will want to budget-in an amount for miscellaneous items such as morning coffee, buying your lunch at work from time to time, new clothes when needed. These small individual items may not seem substantial enough to effect your savings plan however, they can easily add-up to the point where they are the financial hurdle. If you cannot meet the 10% in savings as well as pay for all of your expenses then it is probably time to reduce your expenses at your current income level.
Track Your Spending
If you are unsure about how much you spend on miscellaneous items there are plenty of resources available to help you track your spending. You could collect all your receipts for the month but technology offers us much more efficient tools.
Mint is a web-based and mobile app that will efficiently keep track of your spending habits. The app connects your bank accounts and breaks down your spending into various categories ( it will tell you if you’ve spent more money at the bar then on textbooks for the semester, for example). The practice of tracking your spending is a real eye opener and may shed light on the causes of some of your saving dilemmas. Mint also allows you set savings goals and tracks your progress in reaching those goals. Finally, Mint also conveniently helps you track your investments.
If you bank with TD then the TD MySpend companion app is a great tool to help you accurately keep track of your spending. The app supplies many of the same features as the Mint app above but operates within your existing TD mobile app. If security is a concern of yours, this could be a better tool given that it simply an extension of your current mobile banking app.
Happily Ever After
Saving money for the long-term is a difficult task that takes discipline and proper planning. However, it does not need to be overwhelming. By paying yourself first, building a honest budget, and tracking your spending you can continuously contribute to a savings plan that will be the foundation of long-term wealth generation. These saving habits will let you capitalize on the benefits of compound interest and will result in a happily ever after romance between you and your savings account.
Breaking The Trend