Beginner’s Guide to Saving

Consistently saving money, is easily the most fundamental aspect of personal finance, yet most people treat it like a yellow traffic light. Everyone knows what they’re supposed to do, and they understand why, but still take the chance and speed right through it. And therein lies the problem, too many people find themselves in a situation where (hopefully) they know they should be saving money for emergencies (or vacations, saving isn’t only for bad events) yet they ignore the reality of how necessary a properly-funded savings account is.

It may not be the most glamourous topic in all of personal finance, but it is no less important to pay attention to. Everyday you go without making sure that your savings is being properly funded, is another day you continue to play Russian Roulette. As many people come to find out, eventually your luck will run out. It is seldom a matter of “if”, but when.

Saving Money vs. Investing

I’m sure you’re reading this you are thinking to yourself, “well I may not have a savings account. But all the money I would put into a savings account is being invested, so I’m okay”. As rational as that line of thinking is, it is deeply and fundamentally flawed. And the issue with this reasoning starts with the role each concept plays in your financial life.

Although both saving and investing are concepts everyone is generally familiar with, there are some key distinctions that can not be ignored. These differences can ultimately mean a peaceful night’s sleep while others are panicked about the economy (like right now with the fears of a recession), or being amongst the panicked (because you just realized your financial house is not in order).

Saving is based on the understanding that, “someday” you will be faced with an event (or expense) that you may (or may not) have foreseen. So at it’s core, saving is rooted in being prepared for the unexpected. Which is why most associations regarding a savings account are about an emergency fund, or rainy day fund. Because it does not take much life experience to know that eventually something will come up that may cost more than you have on hand (in your checking account), or you may simply not want to pay for it out of your checking account. Saving money is a low risk, low reward money management concept. There is virtually no potential gain, but also no potential loss.

Investing on the other hand is almost the exact opposite of saving. Like saving, investing is rooted in the same “someday” concept. In this case that the anticipation of the projected “someday” is in hopes that the money you allocated to an asset (or assets) will (literally) payoff. And do so in a way where you not only get back the funds you applied to that investment, but also any interest that’s accumulated since you began putting money into that asset.

The difference is most easily seen not only in the expected occurrence of the “someday”, but also in the risk involved. For saving there is essentially no risk, because the money is kept liquid and accessible. For investing on the other hand, there are two differences. First the money is not always liquid and therefore not always accessible, and secondly because the money is placed in an asset there is no definitive guarantee that you will never lose the money you invested.

Saving at Every Opportunity

Saving money is never easy to do. Between the fact that it is not a mandatory expense, and how difficult it can be to put aside money “just in case”, there seems to be no sense of urgency with saving money. And even for those who have willpower that resembles the strength of reinforced steel, there are still traps that are lurking everywhere. For some the traps come in the form of spending an unbudgeted amount on one big ticket item, then justifying it as “I’ll buy this and nothing else for the next two months. So it balances out”. Whereas for others it may be that their trap is spending a little here and there, and not realizing that when everything is accounted for they spent the same as the person who bought the big-ticket item.

It would be a very fair conclusion to say that both instances are indicative of a need for improved budgeting skills as well as a better understanding of the value of money. The importance of which is highlighted by the short-sightedness in both examples. Not only is it a dangerous game to assume that you can overspend now then underspend later, it’s equally dangerous to get caught up in buying many small trinkets that you don’t genuinely need.

The other and less obvious danger lies in a lack of understanding how valuable money is. The short version sounds a bit like this: money gets devalued more and more each year compared to the previous year, and the cost of goods increases (typically) at about the same rate. So to frivolously spend money now on things that don’t increase in value, and not having an adequately funded savings account will ultimately be detrimental to your finances.

What is a Good Amount to Save?

Everyone knows that saving money is tier one priority, and if you don’t know, now you know (thanks Biggie). What is less known is the amount that should be set aside for saving. While the general consensus is to save as much as possible there are some other considerations that should be factored in before you throw your whole paycheck into your savings account and live off bread, and ramen.

Determining the appropriate amount of savings to allocate requires a considerable amount of forethought. Some such factors that should be considered are your fixed needs, lifestyle preferences, income, and financial goals. If you recall saving is not only about emergencies but also for opportunities. And in totality those considerations are highly subjective, not just on a household to household basis, but on a person to person basis. The subjective priorities that you have may not be the same as your spouse/significant other.

Even though all factors are important in their own right, if I had to choose one as the most important factor, I’d easily choose income. This is because if savings was akin to a science experiment, then income would easily be the independent variable. Meaning that compared to the other factors being the independent variable, changes in your income will have a more drastic effect on the overall outcome.

For example, if your job is more seasonal or cyclical by nature then you have periods where you can certainly earn a lot some months, but there are also dry months where paydays get much tighter and less frequent. If this resembles your current employment structure, then making it a priority to set a savings goal of one-year living expenses would be a great cushion given the volatility in your work schedule. Whereas if your job is more stable then you can more easily predict your income for the foreseeable future. And while saving a year-worth would be a great goal to strive for, a more modest goal would be saving a half year-worth of expenses.

Make Yourself the First “Bill”

Too many times people get paid, spend their money, and if anything is left after their spending save the remainder, assuming anything is left at all. The risk with this method, as you can see is that there seldom enough, or any funds left to allocate to saving. Which leads to a severely under-funded savings account, and that is no different than financially skinny dipping prior to low tide.

However, if that example were to be repeated with the emphasis on saving as the first item on the list, then there would be the benefit of an increased likelihood of reaching the savings goal, as well as a better allocation of the remaining funds, since you would have already taken care of the most important “bill”. Most individuals choose a specific percentage to take out each month, like 10% for example.

For the vast majority, prioritizing saving at the beginning of the post-payday checklist will likely require cutting back on some luxuries and pseudo-luxuries you may have grown accustomed to. Hopefully by now, you’ve come to realize that minor momentary inconveniences, in the name of lifelong abundance is a trade-off that Fincense Fanatics are willing to make!

Supercharging your savings

Seeing your investments providing large returns that enable you to enjoy the lifestyle you’ve always wanted is something nearly everyone wants for themselves. And while investing is largely a lot of work on the front-end, none of the back-end gains can be achieved if you did not have investable income. Which stems from having money available that could be put to use creating the future you want. And that means big investment returns are rooted in saving!

One way to begin supercharging your saving is to pay off your credit card debt as soon as possible. Once this is done you can apply the amount you paid to your credit card to the budgeted amount you set for savings. So now you are budgeting for funds that used to go to the credit card debt and savings to all go to just your savings. Alongside responsible use of your credit card, consider exploring credit cards that provide perks that are relevant to you. For example, some credit cards provide cash back or airline miles. These perks are important because you can apply the same “double up” strategy to some of these perks when you use them.

Another way to ramp up your savings is to have a n additional source of income. In which case the funds go almost exclusively to your savings. For example having your regular job and for a few nights a week, do ridesharing, then transfer those payouts directly to your savings. Having a way to boost your savings that doesn’t adversely affect your health, and well-being will be very beneficial over the long term. And the best part is that you don’t necessarily have to do it indefinitely.

Debt or Saving?

Debt is the “gorilla in the room” for most people when it comes to their finances, and to take the analogy further, those same people usually try to navigate around the “debt-gorilla” while simultaneously ignoring the gorilla altogether. And this balancing act usually backfires pretty badly once things start to slip. That being said, mounting debt can absolutely suffocate any attempt to build up a savings, especially if the interest rates on your date are higher than the mid-teens.

The most ideal way to navigate this decision is to evaluate the amount of high-interest debt you have and work to pay that down (or off) as quickly as possible. While also contributing a reasonable “minimum payment” to your savings.

Save $100K, So Says Munger

Charlie Munger, business partner of Warren Buffet, and a billionaire investor in his own right, is credited for recommending saving up $100,000. In his opinion once you have that amount set aside it gives you the freedom to makes decisions that either are not available to others or that they can not take advantage of because of liquidity. For example, you’ll be able to start a business, acquire franchises or real estate, or even make large investments in the stock market.

Frequently Asked Questions (FAQs)

Do savings bonds count as saving money?

Savings bonds in the U.S. are a fairly safe investment, but that’s exactly it, it is an investment. So for the purposes of a savings account, savings bonds are not a recommended instrument for “pure savings”. The nature of bonds are rooted in them being backed by the full faith and reliability of the U.S. Treasury, which means the bonds are essentially guaranteed to never lose money.

Will my money be safe in an online savings account?

In the last few years online banking has taken off in terms of accessibility and overall prevalence. In most instances online savings accounts can be a safe place to store your savings. However, it is vital to ensure that the institution you use is FDIC insured, and has the requisite guarantees that major, well-known institutions have.

When Can I Stop Saving?

While there is no definitive “I’ve arrived” point with having a savings goal, it is important to ensure that as your expenses increase (whether it be because of inflation or an “intentional lifestyle creep”) your savings is still properly funded.

Understanding Budgeting & Personal Finance

Understand your money, create a budget, and take control of your finances

Your Money Magnifies You

Contrary to the opinion and philosophy of many, money is nothing more than a tool, a means of storing and transferring value. There are some people who give money attributes and associations that are not conducive with the reality of what money truly is, a tool to be used and leveraged.

This tool is best viewed as a mix between a mirror and a magnifying glass. Money is a mirror because it is a reflection of you. It reflects how you see yourself, what your priorities are, and what you value.

Money is a magnifying glass, because for most people if you gave them more money, no matter how idealistic and romanticized their self-perception may be, if given more money, they’re likely to do more of the same things that they are currently doing.

So this means that money can either be a tool to help you achieve your financial goals, and provide you the opportunity to life a life of luxury (as defined by your personal values). Or it can work against you, by way of financial ignorance, and intellectual neglect. Given that you are here reading this article, I think it’s safe to say that you are likely interested in money working for you and using money as a tool to make your life richer and more fulfilling.

Building wealth, and enjoying the “fruits of your labor” stem from first understanding where your money goes and constantly learning more efficient ways to use it.

What Does It Mean To Make Your Money Work For You?

Your money is your employee. let me say that again. Your money is YOUR employee. Which means that you are in charge of what your money does, (or does not do). Like any good employer, it is absolutely vital that all employees are working for the best interests of the company. The same should said for how you view your finances. The money in your possession should only be used for the best interests of your “company” (aka your life).

So it would be wise to make sure that your employees are all on the same page, working to make your life as pleasant and stress-free as possible. Being that you are fully in charge of your finances, using your finances to continuously improve your financial stability and security should be the top priority.

As much you may visualize and dream about multiple streams of income, not having to work a 9 to 5, and travelling the world on sailboat (which doesn’t sound like a bad idea at all), financial independence is near-impossible without proper financial literacy. Building wealth, and enjoying the “fruits of your labor” stem from first understanding where your money goes and constantly learning more efficient ways to use it.

Budgeting basics

Budgeting is to the world of personal finance, what flossing is to oral health. Everyone knows about it, everyone knows what it is, everyone claims to do it. But the yet the dentist (your bank account at the end of the month) seems to always disagree that it was done well, if at all.

So let’s define what a budget is, without defining it. A budget is a financial prism that can be used to change the way you perceive the usefulness and allocation of your money.

Effective budgeting is predicated on understanding the flow of your money., think of it like the supervisor at work. The same way your supervisor (should) be making sure that everything that needs to get done is being accomplished, your budget should act in the same manner (if used correctly). In order to budget properly, it requires you to be intentional and deliberate about where you allocate your money. And in so doing, you are better able to account for all the necessary financial obligations, which in turn reduces impulsive spending.

The goal of budgeting is to always spend less than you earn.

When creating a budget, assign every dollar you earn a “role”. Some roles may include:

• Managing reccurring expenses

• Eliminating debt

• Paying down long-term expenses

• Saving for leisurely experiences

• Long-term investing

Budgeting is not a one-time action. It should be something you actively engage in every day, if not, then every few days. this way you can stay on top of your expenses and finances in general. You may need to adjust your budget from month to month to account for large expenses or your own spending habits.

Tracking your finances helps you be aware of what you have coming in, and where it needs to go. Being deliberate and intentional about how you use your money, enables you to life a more rewarding life, because you know that you have prepared and accounted for all possible contingencies, from fairly-major car repair to an impromptu dinner with friends. This is the first step towards making your finances truly work the way you want to, rather than feeling controlled by your finances.

Debt is no friend of yours

For the purposes of this article, debt is never a good thing. Yes there are exceptions and extenuating circumstances. (To modify a quote I heard from a religious leader talking about sin) Debt will cost you more than you’re willing to pay, keep you longer than you want to stay, and from your original destination, take you farther away. Even though the original context was in regarding to morality, the concept applies very well to debt.

When you accumulate debt, you end up paying more than the original cost of the item due to accumulated interest. and as a result you likely pay mainly interest on the debts especially if you only pay the minimum (more on this in a another article). This increased likelihood of paying primarily only on the interest is how debt will have your money working against you, because it cuts into your income and allocation for other (more pleasant expenditures).

Once the debt is paid off, the newly-freed funds can now be spent on other things. Whether that be a bottle of wine, a nice dinner to celebrate, or automatically re-allocating it to other financial goals. (of course I’m all for being methodical and highly efficient with finances but an affordable night out, is no financial crime). As long as the mini-celebration does not end up jeopardizing your financial stability/goals, and you get right back on track, I have no objections.

Now that the debt is paid off, and you enjoyed a reasonable celebration, it’s right back to financial discipline. So those funds need to go to where they will be best utilized. For example, saving for education, creating a retirement fund, traveling, or improving your living situation. If those goals are already accounted for, consider ways to grow your wealth and create more financial stability and independence via starting a business, or investing it.

Be ready for an Emergency

Surprises are not only scary, but also immensely stressful when you do not have control of your finances. An unexpected car repair, a medical procedure, a job loss, or any other financial emergency can quickly send you spiraling into new or more debt, wiping out any progress you've made towards taking control of your money. Which can set you back months if not years, with your financial goals.

Hence the ever-present to create and maintain a emergency fund. Though it may not seem like it, this is another way to make your money work for you, because it allows you to be prepared for unexpected situations. Which reduces the likelihood that you’ll go scrambling for debt as a way to take care of the circumstance.

An emergency fund’s primary purpose is giving you peace of mind that you are in control, even when you are in a difficult situation that may not be of your own doing. However, this takes time, and in some cases, lots of it. Ideally, you should have three to six months of income saved to hold you over if anything happens. If you’re just starting out with an emergency fund, an consistent amount you can set aside helps.

One way to maximize your emergency fund is to put it in a high-yield savings account (which will be discussed in detail in another article). The main benefit is the interest earned in this type of account is higher than a regular bank account. This means the money you save will make money while it’s in the high-yield account.

Once debts are paid off, the excess funds can be used to increase the allocation toward the emergency fund.

Invest, invest, and invest some more

Once you have freed up all that extra money from paying off your debts and maximizing your emergency fund, you can put your money to work via investments. The investment goals you choose will depend on your personal priorities, lifestyle, risk assessment and other important factors.

In addition to a healthy emergency fund/savings account, you will also benefit from establishing retirement accounts. Other accounts/funds that you may want to consider are:

1. Education savings,

2. A fund for travelling and experiences

3. A house-purchasing fund

4. Extracurricular fund for dependents

5. Long-term care savings, for yourself or dependents

It may seem like overkill to have so many funds, and yes some of them can be consolidated if you see fit to do so. However, I list them to emphasize that there are many reasons to have money set aside. It makes it easier to have peace of mind while travelling knowing that you’re only using funds from the “experiences fund”. And as mentioned earlier, these funds can be leveraged by being created with high-yield savings accounts or other low-risk investment vehicles.

Remember, when you pay interest, you are losing money. But when you earn interest, your money is making more money all by itself. And the longer you can leave the funds untouched, the better your returns will be once you finally decide to access them.

Investing is so beneficial because it is a great way to have your money work for you via interest. Which means that if you invest consistently, your money will begin to grow on it’s own. Some investments also pay dividends, which you can either take as extra income or reinvest to help your portfolio grow. The secret is to invest as much, and as early as you can to maximize your opportunity to enjoy financial freedom sooner!

To be clear, investing is a long-term strategy for building wealth. No matter what the medium of investment is, investing is primarily a ling-term method of growing your wealth. As with most things in personal finance there are exceptions, and the same is true with investing. However, for purpose of this article, the primary function of investing is a long-term way to accumulate wealth, if done correctly. (Investing will be addressed in detail in another article).

One important aspect of smart investing is to diversify your portfolio. Having all your money in just one type of investment increases your risk. Which in turn means that if that investment falters, you could lose most oor all of your invested funds. Instead, spread that risk out by investing in a mix of:

• Stocks

• Exchange traded funds (ETFs)

• Various bonds

• Mutual funds

• Real estate

• Business (your own or someone else's)

With all the options for investing on the market, there is certainly a platform for all budget sizes. While many larger institutions may have a considerable minimum initial investment, there are many apps and platforms that allow for significantly lower minimums and in some cases even allow fractional shares.

No matter how you are saving or investing, have a specific set of goals. Know what you are working towards, like paying for your child's education, purchasing a home, or early retirement. This will help focus your spending and give you motivation, as well as helping you decide what types of investments are the best for you.

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THE BOTTOM LINE

Your finances are yours. You are solely responsible for the state they are in. And as such it is squarely on you to learn how to properly budget your money, so you can ensure all your financial obligations are met and you still have enough discretionary income to enjoy treats.

Debt is another thing that must be understood and accounted for. It’s impact on your finances may not be glaring and obvious at first glance, however that is no reason to neglect knowing how much you owe or what the interest rates are.

Being ready for emergencies and investing are the last were discussed in this article and both topics are important to having a balanced approach to finances. In regards to having an emergency fund, it allows for peace of mind knowing that you have a cushion in the event of unforeseeable circumstances, and regarding investing, that is a way for you to gradually grow your wealth and financial legacy.