You can do two things with money: Use it now, or use it later which is also known as saving it now.
Using money now is extremely easy, but saving it to use later is hard.
We will teach you how to save money so that you can afford your future now.
There are two main questions you need to ask yourself to effective save money:
A.“How much will I need?”, and B.“What can I afford?”
1. “How much will I need?”
2. The Goal.
The first question you have to ask yourself is, “What am I saving for, and how much does it cost?”
Saving is a mindset. It is like having the resolve to go to the gym, or to eat right. It requires patience, dedication, and above all a goal to drive you.
An example of a goal could be:
- A new phone or computer
- A number (I want $10,000 in my savings account)
- 2. Time-line.
The next question you have to ask yourself realistically is, “How long do I have to reach my goal?”
An example of a time-line could be:
- 1 Week
- 7 Months
- 5 Years
- 3. Assets
The next step is to ask yourself, “What do I currently have?”
Take a tally of the money you currently have that you can put towards your goal.
Examples of Assets:
- Savings at the bank.
- Money / Change lying around at home
Putting it all together (A):
You now have all three ingredients which will tell you how much money you need to save to achieve your goal.
- Goal: A second–hand car costing $10,000
- Time-line: You want it in 15 months
- Assets: You currently have $2,500 saved up.
- Hence, you need to save $10,000 – $2,500 = $7,500 in 15 months
- OR $7,500 / 15 = $500 / month
- B. “What can I afford?”
- 4. Revenues
You have to calculate what your current income per month is which will be the main contributor to your savings.
Examples of Revenues:
- Pension Cheques
- Government Cheques
- Interest income from fixed deposits
Now you have to ask yourself, “What do I have to pay for every month?”
Examples of Expenses:
- Rent / Mortgage Payment
- Electricity Bill
- Phone Bill
- Car Lease Payment
- Grocery Bill
Putting it all together (B):
You now have the information which tells you how much money you can actually afford to save to meet the saving requirements.
- Revenue: $2,500 / Month
- Expenses: $2,200 / Month
- Savings you can afford: $2,500 – $2,200 => $300 / Month
Putting it all together (A+B):
We have already established that in order to buy a $10,000 car in 15 Months with 2,500 already in savings, you would need to save $500 / Month.
Instead, you can only afford $300 / Month.
Hence, you are missing $500 – $300 => $200 / Month
There are four main variables that you can change to make up the deficit between “how much you need” and “what you can afford”:
Goals: You can re-assess the goal that you set for yourself. In this example, you can try to choose a cheaper car.
- Ceteris Paribus (Keeping everything else the same), you can afford a (($300 X 15) + 2,500) = $7,000 car instead of a $10,000 car.
Time-line: You can revise the time-line you had in mind to buy the car.
- For example, instead of 15 months to buy the car, it would take you (($10,000-$2,500)/$300) = 25 Months, given what you can afford.
Revenue: You could supplement your income with additional income which would increase the savings you could afford.
- If you found a job that pays $200 / Month in addition to your current job, your savings goal would be met: $300 + $200 = $500 / Month
Expenses: Finally, one of the simplest, and yet hardest methods to achieve your savings goal is to be more responsible with your expenses. Some ways you can reduce your expenses are:
- Turn off the heating when you are not around to reduce electricity bills
- Shop around for a mortgage, or car loan with a cheaper interest rate
- Separate needs and wants when shopping
- Bundle your services
- Cook at home as opposed to eating out
- Track your spending at sites like Mint.com
Saving really is as easy as 1-2-3. You just need to remember that to achieve your savings objectives you need to
1) Calculate what you need,
2) Estimate what you can afford,
3) If a deficit exists, tweak the four main variables to equate 1) and 2).