Obviously, there are many ways to save money. However, after advising dozens of people, we want to introduce you to the habits and customs of the best savers.
The best way to save is to have a clearly defined purpose for the money saved and a time frame. The amount of monthly savings should be feasible and easy to achieve and should be defined based on a thorough analysis of income sources and expenses.
Be clear about what you are going to save for
This characteristic is important: those who have it, manage to save more on average than those who do not.
If the person is not clear about what they are saving for, sooner rather than later they stop using the budget because they see no point in doing so.
In other words, they don’t see that the time and effort involved in budgeting and tracking are being rewarded.
On the other hand, if the person is clear about what he/she is saving for, he/she can quantify his/her goal. If he quantifies it, he can more easily and precisely define how much he needs to save per month or even per week to reach his goal.
The savings goal must be relevant
The importance of the savings goal is a continuation of the previous point. People who have a transcendental purpose for their savings definitely achieve it with more certainty than those who do not.
For example, a mother who saves to be able to afford the best education for her child has a much stronger incentive than one who saves to buy a more powerful car next year.
This person who saves for a “non-negotiable” purpose, will walk the extra mile and will give more of himself to achieve that uncompromising goal.
Many people who save for a less momentous goal often lower the intensity of saving as soon as they come across another shiny object or the craving of the moment.
Some “important” goals:
- Early retirement: freedom of time and location
- Own home
- Education of children
- Debt repayment: not only for avoiding interest payments but also for the freedom of not owing anyone.
Budgeting savings month by month
When we are in the habit of saving and we are used to the fact that part of our income comes out of our account, or better, comes out of our employer’s account and goes directly to our exclusive savings account, in the end, it becomes natural and obvious.
Consistency in saving produces a habit that ultimately builds great capital and achieves incredible goals.
Then the task is to define the amount to be saved month by month, hopefully, a fixed amount and maintain it for years, or decades, with one exception: salary increases and bonuses, which should increase the initial amount each time they arrive.
Automating savings
As a follow-up to the previous point, savings discounts should be automatic; I should have to do absolutely NOTHING to make them happen.
It’s just like dieting: If the couch in your house is strategically placed in front of the TV, and the french fries station is next to the couch, it’s only natural that every evening you end up sitting on the couch watching TV and eating fries. It’s natural.
In the same way, if you instruct your employer to transfer 300 USD (or the amount you specify) every month to a specific account for your savings, you will start saving without realizing it and without lifting a finger.
Conversely, if you have to transfer here and there, and figure out where to keep the money each month, it’s only a busy month away before it doesn’t happen and you start to fail with your monthly savings.
Define in advance where to save money
Defining the destination of your savings is a prerequisite for automating it. When you commit to your savings, it is advisable to make a brief study on the most convenient savings instruments. Some requirements are:
- Security: Hopefully you have state insurance so that even if the bank fails or you are the target of a robbery, you won’t lose your money.
- No fluctuation: The amount saved should not fluctuate, other than with monthly contributions and interest.
- Automatable: It must allow automatic transfers or consignments.
- Illiquid: It should not be so easy to withdraw money. A checking or savings account linked to a debit card and credit card is definitely not the best alternative.
The planned amount must be feasible, even if things do not go as planned.
If our savings capacity is (for example) 360 USD, we are tempted to budget a savings of exactly 360 USD. But what if we are invited to a wedding and buy a gift of 100 USD? That month we will not be able to save the full 360 USD, but less.
For a savings capacity of 360 USD, you can save 200 or 250 USD, so there is always a safety margin. In this way, you will be more relaxed and drastically increase the probability that every month you will send to your savings destination the amount you set out to save, without exception.
Exhaustive analysis of income sources and expenses
With this technique you can skyrocket the amount of savings; it is the most powerful ninja trick in our entire list as far as the amount of savings is concerned.
The Internet is full of articles on “10 tips to save more money”, “17 tips to improve your savings”, and “Top 10 best ways to save”.
That’s all well and good, the problem is that they are not exhaustive methods. This means that you fully analyze all income and expense lines and evaluate ways to maximize savings in each of them.
This is a really complete and serious exercise.
We ourselves at income-blog.com have an article on the “50 ways to save“, but beyond the importance of each way, the most relevant thing is that it describes step by step how to thoroughly analyze and optimize your savings opportunities.
Prefer saving over spending
There are two kinds of people: those who prefer spending over saving and those who prefer saving over spending.
Those who like to spend more than save take great pleasure in leaving the mall full of packages of clothes, watches and shoes.
Those who prefer to save can be seen enjoying the best restaurants on the first weekend to celebrate the fact that they met their savings goal.
As a result, those in the second group generally tend to save more than those in the first group.
You’re probably asking yourself, “How can I move from the spend-loving group to the savings group.” That’s a really good question. No matter how organized you are, your savings won’t reach significant proportions until you enjoy saving.
The answer is not only very individual but very subjective. It is rooted in each person’s character and subconscious beliefs. However, the following is a list of actions that may help:
Contemplate the great goals you can achieve
By having a consistent savings plan, such as the one we describe in this article, over the long term you can build a truly million-dollar estate, which is more elusive without disciplined savings.
Comparing financial life projections with and without savings
The following graph shows the savings performance of three people at age 63. All three save the same monthly amount and earn the same interest. The only difference is that Julia starts saving at age 20, Tom at age 30, Judith at age 40, and Carlos at age 50.
Carlos ends with 72,645, while Julia with 1’070,849. In other words, Julia ends up with almost 15 times more than Carlos.
With a numerical understanding of the great impact that consistent saving has on people’s wealth, many are beginning to view saving with more affection and spending with more caution.
Savings must produce at least enough to offset inflation
At this point, we deal with a different topic than savings: investment. It is convenient that you rent your savings. This way you can access the incredible power of compound interest.
However, you have to do it prudently. By prudence, I mean that you should prepare yourself to understand investments, and know how to make the amount saved produce while limiting the risk.
If you are interested in this topic, we invite you to read the article How to invest well – Mega Guide.
There are some safe alternatives, which fluctuate little and with which you can obtain certain profitability. Some of them are:
- Savings accounts with tax benefits
- Treasury or high-quality corporate bond ETFs
- Bank deposits in small financial institutions (plus interest) are guaranteed by the state (plus security).
Conclusions on how best to save money
The best way to save is to have a clearly defined purpose for the money saved and a time frame. The amount of monthly savings should be feasible and easy to achieve and should be defined based on a thorough analysis of income sources and expenses.
If the person is not clear about what they are saving for, sooner rather than later they stop using the budget because they see no point in doing so.
Your savings will not reach significant proportions until you enjoy saving.
The following are characteristics of the best way to save:
- Be clear about the purpose of my savings
- The goal or purpose must be truly relevant to my interests.
- Recurring savings, preferably monthly
- Automating savings
- Define the instrument of the savings to be used
- Feasible amount, even in case of unforeseen events
- Exhaustive analysis
- Prefer saving over spending
Savings must produce returns!