How to Save a “Life-Changing” Amount of Money
If I said, I was going to give you enough money to change your life what number jumps into your mind? $1 Million? $500,000?
If it’s more than $20,000 you are dreaming bigger than the average person. A recent poll found that the average American considers $19,800 to be a “life-changing” amount of money.
At first glance, $19,800 seems like an incredibly small amount of money to be considered “life-changing” but it makes more sense when you consider the fact that 61% of Americans do not have enough saved to cover a $1,000 emergency.
When asked how they would pay for a $1,000 financial emergency like a medical bill, only 39% said they could pay for it with savings while nearly 20% said they would put the emergency cost on their credit card.
For the 61% of people who would need to go into debt to cover a $1,000 bill $19,800 could easily be considered a life-changing amount of money.
How to Save $19,800 in 4 Simple Steps
The good news is that each of us has the potential to easily save a life-changing amount of cash. Here are four simple steps to get the job done.
(Note: while these steps are “simple” that does not mean it will be “easy”, it will require sacrifice)
Step 1: Calculate Your Take Home Pay
Before you get started on creating a savings plan, you’re going to need to know exactly how much money you have coming in every month. Your take-home pay is the amount of money you earn every month net of taxes and other deductions.
If you are a salaried employee who gets paid every two weeks your monthly take-home pay is very easy to figure out.
- Grab your paystub and find your net pay (after taxes and deductions)
- Multiply that number by 26
- Divide that number by 12
If you clear $1,000 every two weeks, your monthly take-home pay would be $2,166.66 ($26,000 divided by 12 months).
Step 2: Track Your Spending
Now that you know how much money you are taking in every month, it’s time to figure out where that money is going.
There are two ways to track your spending.
The old-school method would involve Keeping track of every receipt of every purchase you make for 3–6 months and breaking your spending down into separate categories like food, housing, car, entertainment, etc…
The tech-savvy method of tracking your spending would be to use one of the many Fintech apps and websites that help you easily track your spending. The most popular spending app out there is Mint.
Step 3: Determine a Timeline
The third step is to determine your timeline for when you would like to have $19,800 saved by. Divide $19,800 by the number of months you want to save that money by and that will tell you how much money you need to save each month.
If you are starting from scratch and want to save $19,800 in 3 years, you’ll have to save $550 per month.
Step 4: Create a Budget
The final step is to create a budget where you allocate $550 (or whatever number you calculate in step 3) into savings each month.
A budget is a reflection of your priorities. If saving $550 per month is a financial priority, then that needs to be reflected in your monthly budget.
If after completing steps 1–3 you find that you can’t find enough money to save $550 per month. You’ll have to start back from step 1 and re-evaluate things.
Step 1- Is there a way to increase your take-home pay? Either by picking up overtime hours or picking up a side-hustle?
Step 2- Take a real hard look at your expenses. If you say you can't find enough money to save but you're still spending $30 a week at Starbucks, you may need to make some sacrifices.
Step 3- You could consider extending your timeline for saving your $19,800 (or whatever amount you are trying to save). Increasing that timeline from 3 years to 4 years would reduce the amount you need to save from $5550 to $412.
I use $19,800 as a specific example but these 4 steps can be used to achieve any savings goal you have.
- Find out how much money you make
- Figure out where your money is going
- Figure out how much money you want to save and when you want to save it by.
- Set a budget that included the monthly savings that will get you to that goal.
It’s simple, but it’s not easy.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions