A penny saved is a penny earned. No matter how much or how less you earn, managing monthly budget as well as planning savings is an important part of every household. The percentage of income you save is not as important as developing the habit to save. After following the obvious steps of building an emergency fund and a retirement savings plan, you should look for additional ways to save. You need to know how to spend monthly salary, keeping in mind both the short-term and long-term household needs.
Short Term versus Long Term Savings
Short-term goals can be as simple as saving a particular amount of money every month or spending less than a certain amount of money every month. It is often associated with saving money for something important you need to buy in near future, such as for the down payment of the car or for the high-end mobile phone you have been longing for.
On the other hand long term goals are related to saving for distant future. It is a chunk of money you save and forget. Long term saving is basically a combination of several short term savings, which when combined together become a significant amount. This amount is usually kept aside for important future needs as well as for unforeseen emergency needs. From payment of heavy tuition fees of the professional course your daughter opts for to payment of emergency medical needs, long term savings are really very important. Long-term goals (for your long-term household needs) need more commitment and patience as compared to short term goals
Get ready and count your numbers
Set short-term and long-term budget and financial goals. Enlist all your current household needs, predict and note down all other household expenses you expect in the future. This helps you calculate a rough amount of what you will need to spend and how much you can plan to save
How much of gross income to save each month?
Like everything else, preparation and practice go hand in hand in giving you a better chance of making it to the goal. We believe you should glance at just two of the many popular theories of budget percentages given by great financial experts:
- The “60 Percent Solution”: Essentially, this budget needs you to adjust your regular monthly expenses within 60% of your gross income, so that you can accommodate all three i.e. savings, retirement and spending money.
- Elizabeth Warren’s balanced money formula, which recommends us “to set aside at least 20% of after-tax income for Savings, keep Needs below 50%, and use the rest for Wants”.
The “ideal budget formula”
Plainly speaking, the whole bunch of theories that showcase themselves to be the “ideal budget formula” boils down to just one simple thing: You should do what works for you. Not everyone is in the same situation and the percentage of income that can be practically put aside for savings varies from case to case, and from individual to individual by great lengths. We have gathered a few good tips for you to help you out in saving and growing that you cannot miss:
Tips for Short Term Savings
- Try to pay all your bills online. Make these payments pre-scheduled, and preferably automatic, so less worries for you. Also, it is advisable to pay all your bills at the same time and be done with it. You then get a sense of the big chunk of your after-tax income that you are left with. Now you get the idea, right?
- Set a day and time when you take a look at your finances each week for half an hour. Enter your transactions into your financial software, ensure that all bills, that should be paid, have been paid and review your budget.
- Make a list of the absolutely essentials that you pay for and cannot do without. It may include essentials like rent or mortgage, electricity and heat, food and other household need. Now this time, you get the sense of the big chunk of your after-tax money you cannot spend for fun, but to sustain.
- Use software to plan your budget. Personal finance software have built-in budget making tools that help customize your budget and analytics that help you to better understand your spending habits. It does not make much sense to plan heavily for saving while squandering money in buying expensive personal finance software. Popular choices for free programs are Quicken, AceMoney, BudgetPulse, Google Spreadsheets, Mint, Microsoft Money, GnuCash, Wesabe, MoneyTrackin and Yodlee.
- You will most likely need cash for gas, groceries and spending money. So, use the credit cards when you utterly need them. Pending credit card bills can cause a huge blow to your budget planning.
- Avoid using credit cards. Or even better, have none. It is not “old-fashioned” rather getting prepared to hold your ground when you get tempted to spend. It is quie obvious that you tend to feel the pain of parting with your money more when it’s cash you spend. Suggested alternative: Use a debit card if you need to.
Tips for Long Term Savings
- The basic rule to save money for long terms is to have a written plan that you strictly follow.
- Plan ahead and have a saving plan for your retirement. Saving money for retirement is as important as spending money in the present time
- Paying off all your debt and becoming debt free is an essential step towards your long term saving goals
- Small expenditures can cause huge blow to your long term savings. Avoid eating out unnecessarily, cancel monthly subscriptions of things you don’t really need and so on.
- Instead of thinking how much to save in order to meet your short term needs, start thinking in terms of long –term financial goals such as retirement plans
- Every few year, purchase an investment plan that is difficult to dissolve mid-term. Such investment plans offer good ROI and come really handy in the long run
Summing it all up
- The percentage of your income you save is not as important as you developing the habit to save.
- Set short-term and long-term budget and financial goals, striving as far as possible to include and predict additional future expenses.
- Do what works for you. Do not mind the ideal percentage.
So, now that you know what to do next (i.e. to develop the habit of saving with serious commitment) we bid you farewell to ride safe on this fantastic road that leads you to financial freedom. Keep things simple while budgeting and do not forget the above tips on how to save and budget that we believe can make your ride smoother.