In part 1 of this blog, we talked about the emergency fund. We went over how much to save and when to start saving. Your emergency fund is the money you save for those unfortunate events such as losing your job, your car breaking down, or a medical emergency and so on.
My experience has taught me the importance of having an emergency fund. Although I am much more prepared now than I was before, there were lots of bumps along the way. You would think, once you know how important it is to save, and how much you need to save, you would just go right ahead and start saving. Unfortunately, it is not quite that simple.
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Some of you might say “duh… saving is hard.”
That was what I thought too at the time. Then I learned these three steps that completely changed how I save money.
Step 1: Set A Tangible Goal
What makes saving so hard is that it is a billion times easier not to. The main difference between those who save and those who don’t is ACTION. I decided I needed to save $6,000 for emergencies. That was a goal I set. Sadly, it was not tangible. You might ask “how is $6000 not tangible?”
Here is why. For any goal to be tangible, you need to be able to visualize the when and the how. There is a key difference between a dream and a goal. When you know what you want and imagine yourself having it, it is a dream. Your dream becomes a goal when you devise a plan that can get you there. Your goal then becomes tangible when you have a start and end date, along with something to measure your progress with.
Those were the key elements that were missing in my goal to save $6000. Not only was it not tangible, it was not even a goal, to begin with. You see, at the time, I was only visualizing a destination. I did not have a road map detailing how to get there. I did not set a start/end date, nor did I have a way to measure my progress. So, I came to the realization that I had only dreamt of a time where I would have $6000 in my savings. Unfortunately, dreams don’t come true if you keep dreaming. It was time to wake up.
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If I save a certain, consistent amount each month, eventually I will reach $6000. The real question here was “How much can I save each month?” I knew how much of my earning is left after paying my bills but, does it mean that is the amount I will be transferring to my savings?
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Let’s be real here; you gotta live a little. You are not just going to pay all your bills, put the rest of your money in your savings, and lock yourself in your bedroom. We all have a social life, or a hobby, or both, and those things usually come with some amount of expense. If you want to play, you got to pay, right?
Control Yout Flex Expense
This is money you spend on your hobbies and/or your social life. As the name implies, it is a flexible expense. Meaning, unlike fixed expense, you have the option to spend more or less on flex expenses. You can decide to go to out every night and get a bottle service or you can have your friends over at your house. The difference is that the latter is much cheaper. The smaller you keep your flexible expense, the lesser your total expenses will be. Less total expense means more money for your savings account.
Total expense = Fixed expense + Flex expense
Money you can save = Income – Total expense
The tricky thing about figuring out your flex expense is that it is based on assumption. With fixed expense, you know exactly how much to allocate because the amount is mostly the same. Unless you have changed your lifestyle drastically, your car payment, your rent, phone bill, student loan, and so on do not change monthly. When it comes to your flex expense, you spend more on some months than others. Therefore, you must find a good average. The amount of money you can save monthly dictates how long it is going to take you to reach your goal. However, the money you can save each month is dependent on your flex expense. Therefore, setting your flex expense unrealistically low will only ensure that you fail to reach your goal.
The amount of money you save monthly dictates how long it is going to take you to reach your goal. However, the money you can save each month is dependent on your flex expense. Therefore, setting your flex expense unrealistically low will only ensure that you fail to reach your goal.
Once you know how much you can realistically save monthly, you will know how long it will take you to reach your goal. So when do you start?
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You might be inclined to think that you should wait until the beginning of the coming month, but guess what? That is exactly what you must not do. Take the ACTION away from your goal and it will go right back to being just a dream. The day you calculate how long it would take you to reach your goal is the day you start your journey towards making it a reality. Unless, of course, you are the type of person who gets dressed early in the morning only to go back to bed instead of going to work.
Tracking Your Progress
This is the most overlooked step in setting a goal. If you have no way to check how you are doing, it is hard to see whether you are headed in the right direction or not. I told myself that I was gone save $600 per month which meant that it would take me 10 months to reach my goal. To track my progress, I wrote down my expectations for every two months. Meaning, every two months, the numbers should add up and show that I am on track for reaching my goal. At the end of the second month, I should have 1,200$ in my savings; 2,400$ at the end of the fourth month and so on.
By tracking your progress not only will you able to better motivate yourself, you will be able to detect flaws in your plan early on, allowing you to make adjustments and reach your goal as planned.
Believe it or not, 4 months after setting up this tangible goal, I noticed that my progress was not where it was supposed to be. I had missed a few deposits which, by the way, I had good excuses for missing. I restarted my goal. Yet again, a few months later I noticed the same problem. The issue wasn’t going away; I was just getting better at making excuses.
Step 2: Pay Thyself First
The golden rule of personal finance states that you should always pay yourself first.
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My challenge was staying within my flex expense budget. I kept over spending. To combat my over spending habits, I needed to effect a behavioral change. Pay yourself first means that as soon as your paycheck is deposited in your account, before you pay anything else including your rent or phone bill, you should put money in your savings. In my case, I was getting paid bi-weekly so, I paid myself 300$ first thing in the morning, on every payday. Now you might ask, what difference does it make if that’s the first thing you do on payday or if you do it later?
Key Words FIRST and PAY
Pay attention to the key words FIRST and PAY. By doing it first, you are taking away the option to find excuses and overspend. If the wording was “Save money first,” it would signal your brain into thinking that it is optional. When you have to pay yourself, suddenly your view changes. The money you are trying to save becomes a bill that you need to pay, and with the word ‘pay,‘ comes a sense of obligation.
Game changer right?
The devil is in the details, my friend.
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Step 3: Out Of Mind Out Of Sight
This is an old trick that works so well against most temptations. Keep your saving account and checking account separate. Having your saved money so close to your expense fund is like keeping your ex’s phone number on speed dial. We all know that is always a great idea, right?
By putting some distance between your savings and checkings, you can keep the temptation at bay. In fact, you should compare interest rates and park your money in a savings account with a bank that offers you the highest interest rate.
Furthermore, if your bank offers automatic transfers, be sure to take advantage of that. Automating the ‘pay yourself’ process will ensure that you are making your payments promptly. Not only does it take you out of the equation, you might even forget that you are saving.
- Figure out how much you want to save for an emergency. See part 1
- Find out how much your monthly flexible expenses are and use that to calculate how much you can realistically save every month.
- Make your goal tangible by implementing a concrete plan, setting a start and end date, and tracking your progress.
- Always pay yourself first.
- Set up a separate savings account.
- Take advantage of automatic transfer.
- Start working towards your goal NOW!!! By procrastinating, you reduce your goal to a dream. ACTION is everything.
Set a tangible goal and let us know your start date in the comments below. You will be making the statement “I am a doer and I will reach my goal!!!”
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