7 Steps to Save Money
By Robert E Spillane on The Capital
Managing your money is a valuable life skill that no matter your salary or age, we all should be improving. It requires discipline, consistency, and patience. It is a topic, since graduating and starting full-time work, I have become more aware of. A skill I personally am looking to improve in the hopes of financial independence somewhere down the line.
Financial independence is a lofty goal, but the first step towards this goal is straight forward. Consistently save money.
Struggling to save money isn’t a problem limited to those on low salaries. Your income may dictate your capacity to save money but it does not dictate your ability to save money. Many people with larger incomes can also find themselves with outgoings that outweigh their income.
The following steps outline how we should split up our money after we get paid:
1. Needs — Identify your needs and separate your needs
Needs include whatever you require to maintain you and your families’ health and accommodation. Summarised in the following points:
- Food — This is excluding going out to eat at restaurants or takeaways
- Accommodation — Mortgage/Rent, council tax, etc.
- Utilities (Bills)
- Transportation/Vehicle Costs
- Health — Fortunately in the UK we have the NHS but for those countries without universal health care, health insurance is a necessity and should not be considered optional in your budget.
Now I’m aware these sorts of costs can come at any point during the month. To avoid any risk of “accidentally” delving into these funds, you should separate this money as your first act after you receive your pay.
2. Paying your Minimum Loan Repayments
Pretty simple logic for this step. You can’t save money whilst building more debt. Paying off the minimums on all your loans is not optional, so that is why this I considered the next priority after your needs.
3. Emergency Fund
This may take a few months to build. I believe £1,000 should be sufficient to cover most emergencies. This money should be in an easily accessible account.
Having this fund in case of emergency will ensure that your monthly or weekly budgets aren’t affected in the time of need.
4. Loans
There are two main methods of paying off debt and depending on your preference you can pick which suits you best.
Paying off the highest interest debt first will save the most money. It can be daunting having multiple debts hanging over your head all the time. However, by paying off the highest interest first, you’ll be reducing the total interest built whilst in debt.
Paying off the lowest balance first can give you momentum. When paying off the lowest debt first, you then reinvest that payment into the next largest debt and this snowballs; each time reducing the number of debt sources you have.
5. Investments
Now you’ve paid into all the boring (but necessary) bits, it’s time to have a bit more fun with your money. Investing is what will truly build your wealth. Allowing your money to work for you rather than just sit in a bank, eroding with inflation. You could invest in riskier opportunities that may provide a higher rate of return or in longer-term goals. Whatever you want really.
Investments should come before your wants, consistency is key to saving. If your investments come out before your wants, then you adjust to the disposable income left.
6. Short-term savings
This is the point at which you can start building savings for short and long term goals, such as Holidays and that new 4K TV. I find that if I want something enough and it’s over my budget, I should be willing to wait for it. I will set aside savings pots and contribute a reasonable amount each month until I reach the goal.
7. Wants
If you really struggle with impulse buying, perhaps set aside a suitable “play money” budget that you can spend on whatever you want guilt-free! The level of this budget is dictated by the remaining balance after the proceeding steps.
4.5 Freedom Fund
Depending on your job circumstances you might want more security. You can add an additional step between paying loans and investing. In this step you build up a large redundancy fund, in case you lose or want to quit your job. You should aim for an amount equal to 6–12 months that covers your living costs (the sum of steps 1 & 2).
These steps don’t all have to be achieved at once. You don’t need to strictly follow each step, however it will take longer to reach your saving goals and to build wealth.
