Every millionaire that is self-made at least at some point in their life saved money and invested it. And if they are still millionaires you can be sure that they have their money invested. If your goal is to get some money saving tips and acquire more money this article should give you an idea of where to start.
Why you should save money?
More than half of Americans do not have more than 3 months of savings – CNBS
As I wonder how this is I can understand that a lot of people choose instant gratification over delayed gratification. And by doing this people are putting themselves at a lot of risks.
Unplanned expenses
No matter if you are the luckiest person in the world things can still happen to you that you cannot plan for!
You should consider the risks of not having spare money:
- Getting sick
- Car breaks down
- Kids outgrew their old clothes
- Losing your job
There are tons of things that can happen. You might be able to tell that a crisis in the market is coming. But do you know when? Let me tell you – nobody knows!
A Better House or a better car
We all dream of a better car that we feel has a lot of power, maybe you want that new Tesla, or maybe you are more down to Earth and you want a bigger car to comfortably travel around the country.
Probably, you want to move to a bigger home, because this one needs renovation… badly. Or maybe you cannot fit your stuff in your current place? All those things laying around the house do not have space for themselves, so you have no motivation to clean the house.
Well, let me tell you are not alone!
Taking care of your family
I bet you have been dreaming of that trip with your friends or family for a while now, but there is always something else that you have to spend your money on.
Do you have kids? If yes, are they going to college? Have you prepared for all of that?
I have met quite a few people that are waiting to have kids just because they are not financially stable. I mean I respect that, but is there something you can do about this situation? Of course!
Investing
Why should you invest in the first place? It is so easy to buy all the expensive stuff, go to bars or clubs every other day, take credit, and get a new car, and a bigger home that is in beautiful surroundings. Well here are my reasons:
Not dying for a paycheck
First of all, do you love your job? Do you even like it? For a lot of people, a job is just a place where you go and you exchange your time for money.
There is this book – Dying for paycheck by Jeffrey Pfeffer. It has been some recent studies that when people are working in a place they hate they develop some issues with their health. I believe a few of you felt depression symptoms and a lot more of you had anxiety for at least a while.
If you feel that way you should change something. But how do you know that in another place things would be different?
In my experience, there are problems in every workplace and it will cause you some stress.
Not to lose money to inflation
I hate losing money, even if it is to inflation. One of the money saving tips is not to let your money sit in your bank account. If you do not know what it is here is an example:
Imagine that last year you ate an apple every morning which used to cost 1 USD. This year an apple from the same store costs you 1.1 USD. That is 0.1 USD more expensive than the last year which makes 10%. That means annual inflation on an apple was 10%. On the other hand, we use „inflation“ term when talking about the whole market of the cost of all products and services combined.
Right now in the US inflation rate is around 8.5%.
The point is that if you have money laying down in your bank account or your closet it is losing money because everything is getting more expensive every year.
Retirement
Do you have a plan for your retirement? It depends on in which country you live because there is a very different situation in each one of them. For example, in the US folks have a great thing called 401K, where your work can transfer part of your salary to a 401k account and the money is not taxed.
In my country (Lithuania) we have a somewhat different thing, but we can choose to add money to our chosen investment account from our salary, and again the money is not taxed.
Either way, the situation in your country might be different and you have to analyze it carefully and make decisions from there.
Earn more money
We all must have heard that people are living from dividends. But what does that mean?
To put it simply some companies that are already huge do not plan to grow X10, X100, or X1000 times, so to attract some capital they use motivation to investors by giving them dividends of 1 to 10 percent of their investment.
This is great right? Well, it depends on the sum that you have invested. If you invested enough money you might not have to work anymore and live from dividends.
Start or expand business
Maybe you already are a business owner? If so congratulations on your proactivity!
Either way, you might need money to start or expand your business. The question is how are you going to do it?
Are you going to ask angel investors for it? Or maybe you will ask for a loan from a bank? Sure there are some advantages to this as you can start or expand right away.
But maybe nobody wants to invest in your business or you do not want to own anything to anyone. In this case, your only solution is to work for that money yourself.
Getting rich, financial independence
I bet everyone who is reading this right now at least once in their lifetime dreamt about getting rich and becoming financially independent.
By accumulating enough money you achieve financial independence by investing and passively getting money every month so you do not have to work anymore. Or at least you do not have to work any job you do not want to do.
You cannot find any millionaire who has become one without investing money. Those who acquire money easily by lotteries or by inheritance and do not invest usually end up in the same position financially as they were before.
The reason for that is that they do not know how to manage their money and they should follow money saving tips.
Where to start? Main places where your money goes
If you want to start budgeting or improve on doing that first you must analyze where your money goes. One of the best money saving tips is to track where your money goes.
For example, my bank has a budgeting tool installed, so it is very easy to analyze where you usually spend your money.
There are also possible to do this by doing your budget on a piece of paper, Excel, or getting to the 21st century you can use any of the online tools.
There are 3 main categories where your money goes:
Necessities
This is everything you must spend money on every month to survive.
Food – this is pretty basic, but can draw a lot of your money. For example, you spend a lot more money by going out or by ordering food. One of the money saving tips is that It is much cheaper to cook at home and prepare your lunch for the next day.
House – Do own your place? Great, you do not have expenses here. But do you have a mortgage or do your rent your apartment? If so you have to make a payment every month. The only way to save here is to see if you can afford the place you are living in right now.
Bills – There is not much to save here and the costs should be about even every month except if you live in a country that has a heating season. In that case, you should take into account that some months will require more money.
Transportation – Can you use public transport? Is it necessary to own a car? If so make it realistic. You shouldn‘t own a 20k USD worth of car if you make 20k per year. One of the money saving tips is that it is much cheaper to travel by bus.
Wants
In this category is everything that is considered your leisure time or general want but not needs.
Vacation – We all need to get away from every trouble that we have and I believe it is true for everyone. One of the money saving tips is, also depending on your situation instead of all-inclusive luxury hotels, it is a lot cheaper to travel by car, go camping and be nearer to nature.
Shopping – Cloths are necessary, but do you need all the designer clothes to show off? I mean who cares if it‘s 20 USD or 200 USD as long as it looks good, right? Money saving tips say it is better to look for cheap good quality clothes.
Subscriptions to everything – Being realistic if you want quality content you probably have 1 or 2 subscriptions. However, if you have subscribed to Netflix, Disney, Amazon Prime, and some others maybe it is a bit too much. Do you even have time to watch everything? Following money saving tips it is not necessary to own all the subscriptions.
Money Saving
This is the main category where you want to put your money. If it is at least 10% then great! That is a great start – keep doing at least that.
Retirement – I talked about this before, so just to add – it is never too early to think how you are going to live after all those years of work.
Children‘s future – if you do not have children you should probably not worry about this just yet. However, if you do have them you should sit down with your spouse and decide what you want to give your child or children. Do you want them to go to college? Do you want to buy them a car or maybe a house?
Emergency funds – no matter what your situation is the absolute bare minimum you should have is one month of your expenses. There is a lot that can happen and you do not want to take any credits.
Investing – After you have freed yourself of any credit card debts and have accumulated 3-6 months of your expenses it is a good idea to start investing.
Saving strategies
There are a lot of strategies on how to save your money by having a different account, having physically your money separated into envelopes, and writing what they are for. I will give you a few examples.
Zero budgeting
The key idea here is planning your every purchase one month in advance. You can read more about it in Ramseysolutions.com article.
50-30-20
The 3 numbers represent necessities (50% of your income), wants (30% of your income), and investing (20% of your income). You have read about it before in this article.
The key principle here is to try not to spend more on the first 2 categories. It is good if you can invest more than 20% of your income.
My strategy
I use a combination of some of these ideas. When I get my salary I transfer my money to 2 other bank accounts:
I transfer money for my mortgage and other bills
Then I keep a fixed sum that I calculated I need for this month
And I transfer all the rest to my savings account
Bills account
So, my first account is self-explanatory – I do not want to miss my obligations.
Spending account
The second account is for everything that I will need. It is a good idea to check this number once in a while mostly because of inflation. From here I can spend anything I want guilt-free.
Yes, you read that right. That is the money I do not care for and if I want – meals at a restaurant, a new game, books, courses, and so on.
The reason for this is that we are all human and need to have some leisure to keep us sane. We cannot just stay at home for 30 years or so till we get to our goals and say that now we start to live.
Chances are if you do not spend some money on yourself your whole system will crumble and you will be ending up spending even more money than you intended.
Saving account
The last account is for my savings. Here I keep my money for a rainy day and I invest any surplus from this account.
The key point here is how much money can you allow to save.
If you are used to spending all your paycheck then maybe it would be great to start from low numbers like 10% and gradually increase this number as you get used to it.
I save around 50% of my paycheck which is a very healthy number. Of course, this does not happen every month and I do make some financial inaccuracies. But the idea is not to stop the progress over one bad month.
However, this might be impossible to save 50% with your current salary. In this case, you should see how much you spend on your rent or mortgage. Maybe it is too expensive for you at the moment?
Or maybe the problem is in your other monthly expenses. Do you need that Starbucks coffee every morning?
Maybe the solution would be to find a better-paying job.
All of this is very individual. You need to do this analysis yourself.
Alternative strategy
I got another example from one of my friends. As it works for him it might be a good fit for you too.
In his household, he is responsible for groceries. So, he uses only 2 accounts.
His primary one from which he invests
And the credit card account from where he spends everything.
In this case, my friend transfers the needed amount to his credit card and uses it for every purchase. If he uses more money he simply adds more money from his first account from the next salary.
From this, he gets a slightly better credit score as he uses his credit card and always pays on time.
As you know if you tend to miss your payments your credit score will suffer and you will get a higher interest rate on every credit you might take in the future including your mortgage.
Conclusion
To conclude you have to find what is the best way for you that works. It‘s okay if one or two months you do not keep what planned to do – it is a continuous journey. Consistency is key here. Last of my money saving tips – If you do not stop budgeting you will eventually succeed.
Earning more
If you say it is impossible to keep to the principle above maybe you do earn not enough money.
Why it is important
It is a huge difference when you earn 20k USD per year and when you earn 100k USD per year. Your saving amount in the first case would be only 4k USD per year if you use the 50-30-20 strategy in the second example it would be 40k USD per year.
So, if you invested all that money to 10X your money per year would be nearly impossible. Because of that, it is a much better idea to try to get your income higher.
How to do it?
I believe you all think it is easier said than done, right? Well, I disagree. It is not hard if you keep your working principles intact. I started from the most basic position earning 8.400 EUR but I managed to turn this around in just a few years and become a high-level manager.
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