Saving is easier said than done. Who really enjoys being on a budget? Similar for all individuals, consistently saving money on a regular basis is challenging. But, there are some tips and guidelines that can help you save more without feeling so restricted with your budget. The following information will help you organize your budget in order to promote constant saving and help you achieve your financial goals.
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How Much Should I be Saving?
Firstly, it is imperative to decide how much of your income you’re going to save each month. Experts recommend saving 10% of your income so that the amount you save is proportional to your earnings. This is due to the fact that every person has a different income, thus should save a different amount of money. Those who earn more also have a higher cost of living thus would need a bigger emergency fund and an even bigger retirement fund if they want to maintain their lifestyle. To find how much you should be saving, multiply your income by 0.10. If you can’t afford to put aside 10%, start with a smaller percentage and work your way up.
When Should I Save?
Secondly, make sure you actually save the necessary amount every month. It’s important to consider saving as a monthly expense and obligation to yourself. Treating it like any other type of bill, which needs to be paid no matter what will help you actually save your money. Applying this mentality will result in consistent saving. Moreover, don’t wait until the end of the month to see how much savings you have left. Odds are you won’t have anything left. The best way to determine when to save is by looking at when you receive your paychecks and when expenses get paid. Chose a date and set up an automatic transfer to your savings account so you can stick to it every month.
How do I Save?
Lastly, you have to organize your savings strategically in order to achieve your financial goals. Even though it’s easier to put aside a small amount of your income every month into one account, it’s more beneficial to have several savings accounts. Categorizing your money into three separate accounts, short-term, mid-term, and long-term, will ensure that the money you’re saving will be there when you need it.
Short-Term Savings
Kept in a traditional savings account and easily accessed when needed, short-term savings contain money put aside for the near future. This is your primary savings account you’ll use for personal consumption, like furniture or hockey tickets. Also used for emergencies and one-time expenses, your short-term savings account is your go to savings account. This is why the balance should never be zero and always have the minimum amount of approximately $1000. This will provide a peace of mind, knowing you always have a secret stash for emergencies. When used after an emergency, it’s important to fill up the account for your next unexpected expense.
Mid-Term Savings
Holding money that will be used within the next few years, mid-term savings help you maintain financial stability and achieve your goals. This money is used to purchase major assets that require years of saving, such as a car or a down payment for a house (learn how to save for a downpayment here). Also used to pay off future expenses, your mid-term savings can act as a safety net if you ever encounter unemployment or illness for a period of time.Similar to a “back up” account; it is recommended to have 3 to 6 months of budget expense saved. This ensures enough money to upkeep a household and pay for bills and other expenses for up to half a year. Even with no income, you still have enough money to live comfortably, without having to use credit and accumulate credit card debt. Additionally, mid-term savings are usually kept in Money Market Accounts (MMA) or short-term investments that can be cashed out.
Long-Term Savings
This savings account is what most people save up their entire lives for. It includes all the money saved for long-term goals and big financial events, such as college funds for your children and a sufficient retirement fund. Long-term savings also includes money gained from investments, such as stocks and bonds and even real estate. These liquid assets can help increase your earnings by gaining money on the high-interest rates. Additionally, this money is generally held in special accounts, intended for its long-term purpose. So, you would open up different accounts with specific rates and details, knowing this money will not be used until much later. For example, if you’re saving for retirement, you’ll more than likely put your money in an RRSP account, and if it’s for college tuition, you would choose another long-term, high-interest account.
Determining how much to save, when to save, and how to divide your savings account are the first three steps that everyone should take on their journey towards a healthy financial future.
