Welcome back! Today is Day 5: Savings
“Do not save what is left after spending, spend what is left after saving.” – Warren Buffett
That is hands down my favorite quote relating to finances because it addresses what so many people get wrong about saving. Saving should be a priority not an afterthought. Savings should also be a top priority, arguably your number one priority. In my opinion, saving is the most important aspect to financial freedom.
Not long after graduating college I was talking with a friend and the topic of finances came up. In the middle of our conversation, she happened to mention that she didn’t have a savings account.
I naively assumed that everyone not only had a savings account, but that they regularly put money into it.
I quickly learned that was NOT the case at all. I began asking various people if they had savings accounts and many of them said no.
Saving can be difficult because it requires you to put chunks of money into an account to just sit there. However, a penny saved is a penny earned and down the line those pennies can change your life.
In today’s lesson we have five important categories of savings: why it’s important to save, how to save, what to save, emergency funds, and vacation/fun money funds.
Let’s do this!
Why It’s Important
We cannot predict the future. We can make as many plans as we want, but the reality is that we don’t know what could happen 60 seconds from now. Here are some real life examples of how unpredictable the future is:
- Within the first four months of my marriage to my husband both our cars broke down within two weeks from each other.
- When I was in high school, my families air conditioning broke in the middle of our 105° summer.
- When I was in college, the government withdrew one of my scholarships two weeks before school started causing my bill to spike a few thousand dollars.
- A more serious unpredicted incident was when my husband’s father died unexpectedly when my husband was 20 leaving him financially independent for the first time.
The point is, we cannot predict the future which is why saving money is so vital.
How to Save
The best way to save money is to automate your savings.
If you put away money here and there when you feel like it, that needs to change. Depositing money into your savings account needs to become a habit every single time you get paid.
The fastest and most effective way to save money is to consistently put money into a savings account.
If you think it’s too difficult to remember to deposit money into your savings, schedule a monthly direct deposit from your paycheck or from your checking account into your savings account. Direct deposit makes saving money a no-brainer.
Simply decide how much money you want to be deposited into your savings and ask your bank to make automatic transfers every month. This method will grow your account in no time.
Also, if you have a really good month financially, don’t spend the extra money, save it. Extra income is an awesome chance to reach your financial goals sooner, but it only works if you use it wisely.
What Amount to Save
The easy answer to how much money you should save is to save as much as you possibly can. The more complicated answer is that how much you save varies based on your situation. That is why you assessed your debt and bills inventory in the very first email of this course.
We all have monthly required payments that we can’t neglect. If you make $2000 a month and your bills and debt are $1700, it wouldn’t make sense to set a savings goal of $500 because that’s not realistic.
To figure out how much you should save, look at the budget that you made yesterday and come up with a number that you are guaranteed to meet each month. Then set up automatic transfers from the checking to your savings account on the same day each month.
Remember, “Do not save what is left after spending, spend what is left after saving.” – Warren Buffett
If you haven’t already done so, get yourself set up with an emergency fund and start putting money into that each month.
Emergency funds are vital. In a way, an emergency fund is a special savings account because it holds money until you need it for an emergency.
A popular rule of thumb is to have at least enough money saved to cover up to 3-6 months of you and your family’s entire living expenses.
Emergency funds are often in the back of peoples minds because it can be difficult to allow so much money to just sit in the bank unused. However, if something happens such as a medical emergency or an important appliance breaks in your home, you won’t have to stress out about where to get the money from to pay for the expenses.
An emergency fund also helps you sleep better at night knowing that if money gets a little tight, there is still money set aside just in case.
Vacation/Fun Money Fund
Instead of putting your vacation or your fun outings on a credit card, set up an account to save for those days. When you have money saved in an account for a specific purchase, it’s easier to save because you know where your money is going.
Having a vacation/fun money fund also ensures that you are taking a well deserved break every year because the money is already there.
To do this, open a savings account specifically for this purpose. Again you’ll want to make sure it has the best interest rate possible.
Tomorrow will be all about increasing your income so that you can achieve financial freedom faster.
THE LIFE HUNT
My name is Alyssa Hunt and I help busy hustlers work toward their dreams of business success and financial freedom all while managing full-time jobs and daily distractions. Let’s do this!