Building the right financial habits and knowing how to save when you’re still young will set you up for financial success in the future. While earning a good salary certainly helps, being aware of your spending and learning how to manage your money is just as important to prevent you from living paycheck to paycheck.
Follow the steps below to help you manage and save your money effectively.
Draw Up a Budget
The first step to any sound financial planning is to have a budget. We get it; sometimes it’s not possible to stick 100% to your budget but knowing where your money goes helps you plan and not get caught off guard mid-month when you realize most of your money is spent.
A budget comprises everything you spend money on, including essentials like rent, car payments, food, debt, and utilities, financial goals like savings and investments, and a small portion can be allocated to flexible spending. Ideally, you should use 50% for essentials, 30% for savings, and 20% for flexible spending. However, you may have to adjust the percentages with inflation costs rising.
Another consideration is entertainment and non-essentials. Be realistic – work out how much money you can spend on going out and entertainment and stick to your budget. For example, if your budget doesn’t allow bar-hopping every weekend, choose one or two nights in a month to go out and look for cheaper ways to entertain yourself over the weekend.
Live Within Your Means
For a young person new to the job market and earning a decent salary, it can be tempting to blow their whole paycheck on designer clothes, going out, and the latest tech. Even more alluring is the access to loans and credit, promising them a lifestyle they probably can’t afford, telling them to live in the moment and worry about repaying the loan somewhere in the future.
The problem is that spending all your money on frivolous purchases leaves you with nothing to save, and taking out loans means paying more for these items that you already can’t afford in the way of interest and fees.
While you need a credit history to build up your credit score so that you are a good candidate for a mortgage when you want to purchase a home, you must control how much you charge your credit card, and you should pay it off every month as it will decrease the amount you pay in interest. Paying your credit card on time will improve your credit score.
If there is an expensive item you want to buy, save up for it and try to pay cash as much as possible.
Pay Off Your Debt
Sometimes, debt is unavoidable. Whether you have a student loan, auto loan, personal loan, or even a mortgage, the sooner you pay it off, the better. Delaying loan payments can harm your credit score and incur more interest. For many people, a large chunk of their income goes towards paying off loans that have been rolling over for years, increasing in interest. It leaves very little room in their budget to save.
Have a Savings Fund for Emergencies
Emergencies happen, typically at the worst possible time. Whether you’re dealing with a car breaking down or a medical emergency, you might be forced to take a loan if you’re on a tight budget and don’t have any money saved for emergencies. It will help you out of the trouble, but it will also entrap you in debt and interest that definitely won’t fit into your already stretched budget.
It might seem that there is no room in your budget to save, but even saving $50 a month is also helpful. Rather than manually transferring or depositing money into a savings account, set up your account so that the money is transferred automatically into the savings account every month.
When it comes to the type of savings account, choose a high-interest account like a money market, high-yield saving account, or a certificate of deposit (CD) account. Before opening one of these accounts, find out how quickly you can withdraw your money, as some of them may require you to give the bank thirty days’ notice or charge you a fee for withdrawing the funds immediately.
Even though there may be a waiting period before you can access your money, these accounts are better than a standard savings account. With a basic savings account, your money is safe, and you can access it any time, but because the interest rates are low, your money won’t grow, and with inflation, it will be worth less in years to come.
Save for Retirement
Ask any youngster about their retirement plans, and they will likely shrug it off as something to worry about in the future. It’s far from the truth – a good time to start saving for retirement is as soon as you start working. The sooner you save, the more you will benefit from compound interest.
Most companies contribute towards your retirement plan and match your contributions to your 401K. Still, if you’d like to open a retirement plan on your own, or if your employer does not sponsor it, you can contribute towards an IRA (Individual Retirement Account).
These tips will definitely help you build a better financial life while living a comfortable life. Saving doesn’t mean you give up everything and start living a boring, dull life, but everything out of the limit is dangerous.