First off, I want to give a big thanks to all of my readers, I write this just for fun but I am so happy to hear that my words are useful in terms of helping others with their financial futures.
With that said, after yesterdays post, I got quite the out-pour of text messages asking for help getting started saving money. It is very important, especially at a young age to start saving; whether it be for a rainy day, for a home, or for retirement even, because the money you save now will compound over the years.
The best measure when getting started saving money is to start by putting away 3-9 months of expenses into a savings account, then building off of that with other accounts (i.e. stock, 401k, IRA, mutual funds, property investments) to compound your money after you have an initial emergency fund.
The million dollar question though…how to get started? As Drake would say, “Started from the bottom ($0 in savings), now we here (6 months of expenses in savings)”
Step 1: Take a look at how much income you have coming in vs. going out. This is your cash flow. For example, lets say you make $40k annual salary, this means your take home pay after taxes is roughly $33k. Divide that income by 52 and you have your weekly average is about $630 cash on hand or about $2,750 per month.
Now, lets say your rent is $1,000 per month and utilities are another $100. That leaves you with $1,650 left over for other necessities like gas and groceries. Both are dependent on how much you eat and how far you have to drive to work, I will use my own averages to give a good feel as to how much these may cost. I spend about $50 per week on groceries and $50 per week on gas, which ends up running about $450 total for the month. What is left is now $1,250 for the month or roughly $290 per week on non-essentials.
So, I have $290 per week that I could possibly put into savings. Now of course there are other expenses that come up, like going to restaurants, buying clothing, personal care etc., but if you put some of the $290 per week into savings first that money won’t be tempting to spend elsewhere.
Step 2: Figuring out how much exactly to save. When you are first getting started, it is important to try and save your 6 month emergency fund at a higher rate say 20% of your take home pay rather than 10% once you have that fund saved up. If you make $40k per year, and you save $125 per week of your take home pay, that is 20% and you will have saved $6,500 over the course of a year. Of that $290 you have in cash after necessary expenses, you still have $165 to spend on fun items.
If you want to be a little more aggressive with your savings, so that you have your emergency fund even sooner, I recommend trying to save 30% of your take home pay in the beginning, that would be about $190 per week, giving you $100 per week of fun-money. If you saved $190 per week, by the end of the year you will have saved $9,880.
There are some great resources out there to get started with creating a budget, so that you can reach your savings goals. Last year, I made a very detailed spreadsheet and tracked everything that I spent and everything that I made. I included my income, as well as passive income such as money back on credit cards (roughly $500 in cash back) and dividends in my savings account ($100). I am a big nerd with numbers, especially the type with $ in front of them, so I enjoyed tediously tracking every dollar in and out of my accounts. Now, I know this is probably not the ideal for most, so I would suggest signing up for a free service like Mint.com, or tracking your spending by category through your credit card company. Once you are able to identify exactly where your money is going, you can develop a budget to fit your life style, and once you set a budget your savings goals will be reached with much more ease.
Saving can be tough, but once you get started and have a goal in mind, working toward that and then achieving it is so rewarding. And don’t forget about interest! Because, once you start saving money, your money starts to work for you!