I have to say that I’ve always been a planner and a quite good budgeter, especially when it comes to my own money. Probably I owe this to my dad who gave me an allowance since I was 10 years old, and although I hated having a very limited amount of money to spend, it taught me how to make it last. Many friends in finance, investment, even in real estate have told me that this is not the way of making money and that I should invest, get a loan, etc. but as I don’t make or have that much money, I feel safer watching my savings account grow little by little and then doing what I want. Called me naïve, but I’ve watched too many people struggle because of bad financial advice and I don’t want to be one of them. And my saving have allowed me to do what I want. I managed to save 17.000€ in a little over a year following this steps with a 36.000€ annual salary, it took a lot of effort, but it can be done.
1- Set a goal (even if it’s just a certain amount of money)
Your personal goal can be anything. Start a new project, go back to school, pay a loan, take that Yoga teaching class that you always wanted or leave everything behind and hit the road for a while. It can be anything that you keep postponing “for when the time is right”. I recommend finding something that you really want to do and are willing to commit, because saving requires some effort and it’s a lot harder when you don’t know where that money will be going.
I had the notion I wanted to travel and leave the routine that I had imposed on myself to see the world, although I didn’t know when or where I would go. So I started reading a lot about travelers, nomads, people working remotely, minimalists, tiny houses, in short, anything that could help me have an idea of what I could expect from an alternative lifestyle. Luckily the internet is full of people sharing their experiences, and in general they say that you will need 15.000 U$S to travel for a year around the world. But they don’t tell you how to get there, and that amount seemed as an impossible amount of money to me, considering that I had spent almost all of my previous savings looking for a job after quitting my previous job in Paris. But still, I set 15.000 U$S as my goal, and I promised myself that once I got there, I would quit my new job and do something that makes me happy with a portion of that money.
You should do the same. Research, read, ask, investigate, try to figure out how much money you need to do what you want to do, stop making excuses, and go for it.
2- Know your spending habits
One of the most common mistakes while preparing a budget is cutting down too many expenses, which makes sticking to it even harder. It will take time to save money, and depending on your income, it can take a very long time, so you need to have a realistic budget that still lets you enjoy life.
To be able to do this, you need to know how you are spending money and put some thought in what are the expenses that you don’t really need. A good way of getting to know your personal finances is by writing everything down. You can use a notebook, a spreadsheet or one of the thousands of apps that are in the market. I’ve been using an app called “Expense Manager” which I discovered several years ago, although I have to admit that I don’t always keep it up-to-date. Still, it’s a good exercise to write everything down for at least a month to be able to understand how you are spending your money. And trust me, if you have never done this before, you will probably be surprised to see how much money you spend in things that you don’t need.
3- Prepare a budget (a realistic one)
Once you know where your money is going, divide them into different categories that make sense to you. In general you will have some expenses that no matter what you do, you will have to pay every month such as rent, bills, student loans, etc. Then you will have to spend money on food, transport and entertainment, because you still need to have fun or you will quit your savings plan in no time. And finally you will most probably have some additional expenses that you don’t even know what they are, or you only realize how expensive they are once you put them together, a typical example is alcohol or buying too many clothes. These will be the first expenses to go. I know it sounds hard, but you have to remember that all the beers and cute outfits you don’t buy today, will let you reach your goal faster tomorrow.
Here are some budget percentage guidelines (after-tax) to consider, based on average expenses of young adults in 2016 in Europe and USA:
- Housing: 25% to 45%
- Utilities: 4% to 7%
- Health care (including insurance premiums): 10% to 15%
- Loan repayment: 7% to 15%
- Food (groceries and dining out): 10% to 15%
- Transport: 5% to 15%
- Entertainment: 1% to 5%
- Personal care (including clothing): 5% to 10%
- Savings: 10% to 50%
Some of these expenses such as rent, utilities, health care and loan payments, will be very hard to reduce and can vary a lot depending on where you are living. In general you should already know how much money you need to set aside for these payments, but all other expenses can be adjusted to your personal needs and leave room for a lot of fine-tuning. Keep in mind that all the money you don’t spend in one category will be available for a different one or, even better, it will go to your savings.
For example, I really like food, but I’ve cut down my spending by cooking every night, buying only fresh groceries instead of processed food and never dinning out except for work lunches or very special occasions. You will be shock by how much cheaper and tastier it is to make you own food from scratch than buying pre-made food, even if it does take more time for food to be ready. In transport, I’ve chosen to buy a 50EUR used bike, which is neither pretty, fast or light but does its job and it has saved me from spending 80EUR per month on transport tickets all year round, even during Berlin winter. In entertainment I try to spend as little as possible, but I really like hanging out with friends, so I’ve been inviting people over for dinner at my place, where a dinner for 4 can cost you less than a meal for 1 at a restaurant if you cook it yourself, and usually people really appreciate when you put the effort in hosting them. And finally, I try not to spend in clothing. I’ve moved countries 4 times in the last 5 years, and if there’s something I’ve learned out of this is that you don’t really need many clothes as with a few selected items you can still look great and it’s much easier to move when you can fit everything in one suitcase.
Saving is more about time management and knowing your needs than actually restraining yourself to not spend money. Find what habits you are willing to change in order to spend less and what things make you happy for which you absolutely need to set aside money to make them possible. As I like to travel, I didn’t want to stop exploring during the 20 months it took me to save 15.000 U$S, so I have set aside some money every month which I have used for short trips or weekend holidays instead of clubbing or other forms of entertainment. In general, you will need to change your lifestyle and maybe even your mindset a little bit, but it’s quite liberating to know that you have control over your expenses and you can actually maximize the enjoyment out of your money without constantly feeling you need to make more.
4- Open a separate Savings account
This is crucial. Call your bank and open a separate account to keep your savings if you don’t have one already. Then think of your savings as another bill to pay and every month transfer the amount of money you want to save as soon as you get paid, not at the end of the month. This will prevent you from spending it all in other things and force you to stick to your budget as you are not allowed to touch your savings, unless it’s an emergency.
5- Stick to your plan
During the first few months it will be hard as most probably you will end up spending all you have left before the end of the month, but as your savings are safely located in a separate account, you will be saving anyway. Eventually you will start to realize where you are spending too much, and what things you need to change to improve your plan.
By now you should know exactly how much money you will be spending in each category and how much you will be transferring to your savings account with each paycheck. You have put a lot of effort in planning your budget and you have committed to it as well as to your final goal. But maybe you notice that the plan is not as perfect as you expected, then just change it, make it better, make it work for you and your needs.
This way of saving won’t make you rich and it’s not very glamorous. But if you think that for everything you do in life you will need money, time and energy and they are all equally valuable, then you can exchange time for money by cooking your own food, riding a bike to work or any other ideas you can come up with where spending a little bit more time will help you save a lot more money. Then maybe you are lucky and you will start to realize how much more valuable is time over money, as money comes and goes, while time only goes.
If you need any help with your savings plan, have any questions or just like the post, please leave a comment below and I’ll reply as soon as possible!
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