The key to financial independence is being able to stay out of debt, living below your means, and investing your money. That said, let me share with you the Best Way to Save Money Monthly, so you can be sure that you will stay out debt, have enough money saved for emergencies, and to invest.
Why Save for Big Purchases Instead of Using a Credit?
I can give you a lot of reasons why you should not rely on loans when purchasing something, but the main reason why I want you to avoid a loan is because your financial situation can quickly get out of hand if you have a big loan then one unfortunate event happens, e.g. loss of job, disability, loss of partner.
Another major reason why you want to avoid a loan is that you become a slave to your creditor. Maybe you have not realized it yet, but many people are controlled by their banks or creditors – at least in an indirect way.
Most employees cannot just quit /lose their jobs because they need to pay their mortgage. A great number of people have to do double jobs to keep up with loan payments else their properties will be repossessed thus missing life events that truly matters… Many parents do not have time for their kids because they have to pay their credit cards to avoid incurring interest. One main reason why married couples divorce is because of money issues. These are only a few of many reasons why you should avoid taking loans/ swiping your credit card when doing a big purchase.
Bottom Line: You lifestyle, decisions and relationship with others is greatly affected by the amount of debt you have. The less debt you have the better the quality of your life becomes.
Can I Still Use My Credit Card?
Absolutely, BUT ONLY IF you are financially responsible and if you have savings to pay off your credit card immediately after you purchase something.
5 Steps That I Do to Help Me Save
Step 1: Plan Ahead
If you get a chance to observe a successful person, you will realize that the key to their success is they have a vision/plan/goal that they relentlessly pursued. This should tell you that if you want to be successful at something then your first step is to plan where you want to go/ who you want to be/ what you want to do!
This is also true if you want to be successful in your personal finances and especially if you want to save up for big purchases!
How to plan ahead?
The step is pretty simple. All you need to do is to plan what you want to purchase in the next 5 years, next 3 years and your next 1 year.
A pretty common response to this is, “Why should I, I don’t know what will happen to me in the next 1,3, or 5 years?” God knows I might be dead by that time. I’m going to live in the moment! I am 100% sure that this is a wrong response! Why? Well, there are a lot of people struggling financially because they didn’t plan ahead!
Okay, so back to planning on what to buy ahead of time.
Why planning ahead of time is important?
Money is fluid and it goes to least resistance so you want to make sure that it goes to where you really want it to go and you can only do this if you have a plan.
I believe it is a good idea that once a year, preferably at the beginning of the year, you will take a sit and think of the big purchases you want to do in 5 years, 3, and within the year. Write down these things or events then do quick research on how much they cost.
Here is an example:
Let’s say, you are a recent grad who graduated without a student loan because you were able to budget your money well as well as you were able to do some unique side-hustles while in college.
Now you are ready for the next stage of your life… getting married and having a family, buying a car and a house!
So on a cold January night, you sat down and picked up your budget journal. After doing some research, you learned that the average wedding cost is about $30000. $30000 is a big of a chunk of money but hopefully, your spouse-to-be will share the half of it so you decide to put it in your 5-year savings goal.
You also want a car because your work is a bit far from your home. Since you know that a car is not an investment and a brand new car depreciates in value the moment you drove off the dealership, you decided to get a used Honda Civic for only $7000. You are determined to get it as soon as you can so you put it under your 3-year savings goal.
Finally, after browsing the internet, you found out that semi-detach houses cost around $700k+ because you live in Toronto! Since you wanted to put a 20% down to avoid paying insurance, you quickly realized that you need $140k. There is no way you can save up that amount in 5 years but you write the amount down in your budget journal anyways to remind you that leftover money that you have at the end of the month should go to house downpayment.
That is basically what you need to do when you want to plan ahead for your big purchases.
Step 2: Calculate How Much You Need to Save Per Month
So what’s the next step after writing your big purchases down?
Well, you need to calculate how much you need to save per month.
For this step, you need to make sure that you know your monthly budget, and your savings/month goal will fit your budget. If not, then you either need to reduce your expenses, find some extra work, or find a cheaper alternative to what you want to purchase! Also, rank your future purchases according to its importance to you.
Going back to our example,
First, let say the most important future purchase for you at the moment is to pay for your wedding, then to buy a car, and finally be able to save for a house down-payment.
You know that the average cost of a wedding is $30000 and you are planning to do it in 5 years. You are also hoping that your spouse-to-be will contribute 50% of the total price.
With these data at hand, you figure out that you need to save $250/month or ($30000 divided by 2people divided by 5 years divided by 12 months). $250 a month is hopefully doable to your budget.
Next is to calculate how much you will need to save up for a car assuming that you still have income left. Since you wanted to get a $7000 car in 3 years, then you will have to save $194/month or $7000/3/12 = $194.
Now since saving up for a house is not yet a priority, then it is okay not to save for it yet but at least start saving up for it especially if you have leftover from your income. Once it becomes a priority then be sure to put your money into it first!
Step 3: Create an Online Savings Account
Alright, now you have plans on what you will buy in 5+, 5, and 3 years and you are able to prioritize these purchases. You were also able to calculate how much you need to save per month so you can purchase these things within the period you set.
Now, what will you do once you know what you will purchase and you know how much you need to save?
I would suggest to open a free online savings account and change the account name into the item or event that you are saving for. Naming your online savings account might seem pointless, but it actually helps you to save!
How giving a name to your online savings account help you with your savings goal?
Naming your savings account will help you avoid spontaneous spending because it can help remind yourself what they are for.
If you are tight with cash and you have many online savings account, then the temptation of withdrawing from one of these becomes stronger. The name of your account should be enough to stop you from withdrawing because it also acts as a reminder of what are your financial priorities.
What is the purpose of these named online saving accounts?
After opening and naming your account, your next step is to automatically transfer a pre-determined amount to each of your online savings accounts.
Every bank has now the ability to automatically transfer money from one of your bank accounts to another so take advantage of this. There is no need for you to go to your bank to withdraw cash, divide it, then deposit to each of your savings accounts.
Doing this step will increase your chances of saving up because you do not forget, and you increase your chances of saving up because you are not involved in the process.
Step 4: Create an Emergency Fund
What is the emergency fund for?
Of course, not all future purchases can be planned. Sometimes your car breaks down, or maybe you suddenly need to buy a plane ticket to get back to your home country for emergencies, it could be your aging parents suddenly ask you for financial support or a rainstorm resulted to a flooded basement and so on and so forth.
Having an emergency fund will help you be prepared for these financial emergencies!
How to set up an emergency fund?
Repeat Step 3 but this time you have to name your account “Emergency Fund”.
Your goal is to save up 3 months of your salary. My advice is to be aggressive with your emergency fund at least until you are able to save up the “3 months of your salary” goal. After that, you just need to allocate a reasonable amount of your budget to your emergency fund.
Another thing that you may want to do is to define what is considered as emergencies because if not then everything will be an emergency! You don’t want that because you will not be going to be able to save!
Step 5: Track Your Progress and Reward Yourself
I believe that the key to succeeding in saving up is to develop a habit. The 5 steps that I have shared to you is only knowledge and having the knowledge is not really equal to success.
In his book, “The Power of Habit”, Charles Duhigg explains that in order to form a new habit, you need to fulfill these 3 requirements: cue, the reward, and the routine.
Keeping that in mind, if you want to make “savings for big every purchase you” a habit then you need to fulfill the three things mentioned above. This is the reason why I asked you to track your progress and reward yourself.
Tracking your progress is the cue
When tracking your progress, make an effort to make your monthly savings report visually pleasing or entertaining for you because this is the first step in creating a new habit loop, cue. Once you see this report, it reminds you that you are on to something and most likely will help you strengthen your new habit.
If I were you, I will create a graph that shows my progress and every month, I will check my account and update my graph.
To make it more interesting, I would probably put pictures of what I am saving for behind my graph so it reminds me of what I am saving for.
In my graph, I will most likely be going to indicate where my goal is as well so I know how close I am in reaching my goals. This would motivate me to keep up with my goals.
I will probably print this progress report and post it in my work table or make it as my desktop background so it will stimulate me to save whenever I see it.
Hopefully, you are able to hit your goals every month and if you do, you need to reward yourself!
Rewarding your self is the reward
The second step in creating a new habit loop is to reward yourself after you successfully respond to the cue.
Sticking to the theme of saving, I am not asking you to reward yourself with expensive things because that would defeat the purpose. What you can do is to buy yourself your favorite treat or buy yourself anything as long as it’s not super expensive or even a pat on the back or a simple visual recognition of your achievement.
Pro Tip: If you want this to be more effective, then only buy your “reward” whenever you hit your goals. For example, if your favorite treat is a chilled caffeinated drink and you regularly buy one, then whenever you hit your goal and buy yourself a chilled caffeinated drink then the effect is not as great compared to when you only buy your favorite drink once a month IF you hit your goal.
Repeat the loop
Now to make this a permanent habit, you just need to repeat the loop over and over again.
Every month you create a progress report and post it somewhere you can see every time. What it does is it helps you remind yourself about your goals and it send signals to your body that you need to stick to your savings plan. When you reward yourself every time you successfully hit your goals, you effectively reinforce the habit you are creating. Do this for a period of time and you will have a strong habit of saving!