The world is full of potential savers who can’t make ends meet. With this guide, we hope that it will be much easier for you to start taking the first steps to saving.
The fault that saving is a stranger lies with the poor financial education with which many have reached adulthood and which has led to perennial apathy.
For generations, social dynamics and class hierarchy have diminished the aspirations of ordinary citizens and have condemned them to live on an unambitious economic threshold.
Unfortunately, for many, money is a constant reminder of their own limitations, when in fact it should be a tool of liberation. As a result of this confusion, some have developed a tense and distant relationship with their own finances, managing them based on misinformation and even fear.
This guide summarizes the keys to saving in 5 steps. Some people will be able to do the first steps quickly. But it is critical for a good savings plan that we have the calculations well done to have constant and comfortable savings.
A solid savings plan will help us put an end to financial clutter and frustrations thanks to good financial planning based on these 5 key pillars to saving. The goal is to create a strategy that allows us to take control of our finances and finally start saving successfully.
The 5 steps to save are as follows. Below we will analyze each one in detail:
1. Analyze your finances
Every savings plan begins with an in-depth analysis of the real state of personal finances.
In this first point, we must study in depth 3 aspects: Income, expenses, and debts (if any). The deeper the analysis, the more faithful the portrait of our situation will be, and the better we will be able to prioritize and discriminate expenses.
This step is laborious and takes some time, but don’t panic. Once you have it, you will have covered the most important part of the path.
When addressing the status of your income, expenses, and possible debts, we propose the following questions as a guideline to do the exercise:
Write down the answer to the following questions to know as accurately as possible what your income is:
- What is my income?
- How often do I receive them? Is there an exact date or is it variable?
- Will I get any extra soon?
- Do they owe me money? How much and when will it arrive?
In addition, not only the amount of income is important, but also their stability. Is there a risk of job loss or payroll reduction? Anticipating this setback is essential.
This block is the most complex to measure because both the amount of expenses and the frequency and type must be taken into account. In this case, we would ask ourselves the questions:
- How much have I spent in total this month?
- In what?
- How much money has each expense taken?
As we address these questions, we will categorize the expenses according to whether they are:
- Fixed expenses: Those that we must deal with on a mandatory basis each month and in a stable manner over time. They are the basics that we cannot do without. In this bag would enter the rent or mortgage, bills, food, etc.
- Extra fixed expenses: In this subcategory, we would include regular expenses that are not essential, but are part of our day-to-day. Some examples are gasoline, car insurance, subscriptions to streaming platforms, Internet, gym fees, courses, and classes, etc.
- Variable expenses: These expenses would include material whims and everything related to leisure: restaurants, movie tickets, hobbies, etc.
- Ant expenses: they are not usually given importance because they are indirect and sporadic expenses, but in the long term they have a great impact. We will identify them as those small expenses that go unnoticed but are constant and that normally derive from bad consumption habits. Example: Do you usually throw away a lot of food? If so, start remedying it.
- Unforeseen: Have any recently come up? Do you see another one that could happen shortly? Sometimes we believe that they are unforeseen which are oversights and lack of anticipation. If your mobile phone fails lately, get ahead of this problem and you will be able to face it more calmly the day it is time to repair it or pay for a new one.
- What debts do I have?
- What is the magnitude?
- And the level of urgency?
- Are there any that are about to liquidate?
Savings and debt were never good friends, so it is essential that you be honest with yourself and that you put all outstanding debts on the table. Forgetting them or turning a deaf ear will only make the problem more serious and prevent you from being able to save once and for all. Face them. Of course, remember that debt is not bad, what is bad is excess debt.
Once you have identified and organized your expenses well, it is time to clean up and question your consumption habits and patterns. It is not about punishing yourself but about identifying what you have been doing wrong all this time.
2. Prioritize expenses
Surprised by the analysis of your finances? Taking a step back and taking a general picture of your economy is the most effective way to identify weaknesses.
In the second step to save, it is time to take the expense map and begin to discriminate between those that are real and those that are superfluous. This exercise requires a calm and rational sieve since future savings will depend on it. Here is an example:
- Priority expenses: Here come the fixed expenses, the fixed extras, and the debts. Although the first two are real and necessary, do not resign yourself to paying more for them. Compare offers to save on utility bills and see if your current rent is worth it. You will still have fixed expenses, but they will be better adjusted to your needs. When it comes to extras, check if you’re taking advantage of your annual Spotify subscription or if you can replace the car with a cheaper and greener alternative. We insist: it is not just about eliminating unnecessary expenses, but about readjusting the priority ones.
About debts, these should always be preferential. The important thing is to face them to get clean as soon as possible. Take advantage of payments and injections of extra money to pay off your debts soon.
- Superfluous expenses: Eliminate at the root the ant expenses that anchor you to bad habits and that contribute to waste. Regarding variable expenses, try to have well-controlled leisure by managing your outings so that they fit into a closed budget. This point is the one that requires the most willpower and is the most difficult to fulfill, but remember that variable expenses have no limits unless you set them.
- Savings: It is not an expense, but from now on we will value it as such. If we want to save consciously, we must consider saving as a priority and go to meet it. It is advisable to have it as a fixed expense at the beginning of each month, so we will ensure that the financial cushion grows.
3. Make a budget and control it
Once we have the financial analysis and the selection of important expenses, now comes the most important step: Make a budget and carry it out.
First of all, it is important to know the difference between saving and investing. When we save we are saving money to have it in the future. On the other hand, when we invest, we also seek to obtain a return on the money we have saved, that is, investment is a step beyond saving. First, we save, and then we can decide if we want to invest it and thus obtain returns on our savings.
In this guide, we are going to focus mainly on the savings part, since to start any path it is important to start with the first step.
There are many ways to start saving. To do this, first of all, we will have to know how much proportion of our income we can allocate to savings. One of the best-known expenses is the 50-30-20 law, but there are more ways to do it since its effectiveness depends on the volume of income. Taking this model into account, we will dedicate 50% of the salary to fixed and extra fixed expenses, 30% to variable expenses, and 20% to savings.
A good trick to save is to separate the account where we have the money saved, from our account where we have the expenses, because in this way, in addition to avoiding temptations, we will see how the money in the savings account increases just by the amount that we have established.
To achieve constant savings, one of the best ways is to schedule a periodic transfer from our account where we receive the income to our account where we have the savings. Through this automatic transfer, we can establish that 20% of our income (or the percentage that can be saved) goes directly to our savings account. Thus we will not be able to use that money and we will not have it for our expenses, avoiding temptations and thus helping us to have a strong saving discipline.
To apply and update this guideline, you will need to use control tools:
- Savings account: It is very important to have an account where we can separate the money that we are going to save from the money that we use for our expenses. In this savings account, we can keep the money in cash, have a time deposit, or even go further and invest it. If we want to get more out of our savings, we can invest it, either in stocks, bonds, or investment funds, among other alternatives.
- Savings app: Automating is the most comfortable and effective way to keep the economy at bay. For this reason, some applications facilitate this task. One that we recommend from Economipedia is Goin, a savings app that allows you to make regular transfers from your bank account to your Goin piggy bank. In addition, you also have the option of withholding a percentage of your payroll right when you collect it. Not having this money available in the bank keeps you away from temptations and helps you plan better. You just have to indicate the dates and amounts you want. You can have the money back in your account whenever you want.
- Bank alerts: The technology has its pros and cons, but bank applications have improved in this regard. Some of them allow you to generate alerts so that you are aware when you have exceeded a certain spending threshold.
- Envelopes This option is the oldest. We can withdraw the money from our account and store it in cash envelopes. On the other hand, for many people, it will be difficult to have the savings envelope close by and not be able to touch it. It is also somewhat inconvenient and dangerous to carry all the money in cash.
- Excel: It is the new paper and pencil to keep accounts up to date. Although it is important to keep it simple. It is only recommended if you are an extremely organized and constant person, otherwise, this system will be discouraging and you will end up leaving it aside. For this reason, automatic tools that do this work for us are more recommended. If, on the other hand, you are a very organized and constant person, it can be a very useful tool to keep accounts up to date.
4. Start saving
Once the first three steps to save have been taken, it is time to jump into the ring. From now on, firmness and perseverance are essential, so it is important that you stay motivated by remembering your savings goals. They should be attainable and positive goals as much as possible, or else the process will become exhausting.
Especially if you are just starting, it is essential that you automate your savings and take tools that make this process a comfortable, accessible, and positive experience. All motivation is little to achieve your goal at the end of the month.
Our most important tip is? The best time to start saving is now!
5. Review the process and the first four steps to save
When some time has passed, check if it has worked as you expected or if it has not met your expectations. Whatever the outcome, spend a little time each month end to measure and control the financial decisions you made at the beginning (1. Analyze your finances) and make the necessary adjustments. You will need to modify the savings plan until you find the right key.
It is also important to take into account the different times of the year, if it coincides with the Christmas holidays or summer vacations, or if you are going to embark on a personal stage that requires extra savings such as a wedding, a special gift to someone, the buying a flat, a car, etc. The personal financial situation varies, so you must always keep the savings plan updated.
In the end, remember that you are the owner of your economy and that money works for you and not the other way around. When you have carried out these 5 steps to save, you will be fully trained to comfortably deal with the scenarios and situations that arise. Now it’s your turn.