Budgeting is milestone for saving: Do you find yourself just days before payday thinking, “OMG, I only have 20 euros left!” or “Where did all my money go?” Maybe you’ve even thought, “I really want this, but I guess I can use my credit card.” (Stay tuned for a future post on why I don’t recommend using credit cards or going into debt.)
Even if your income has increased, saving more money can still be a challenge. Why? Because as humans, we tend to spend more as we earn more, often without even realising it. Budgeting helps us use money smartly and reach our financial goals.This post will introduce you to effective budgeting methods that can help you boost your savings effortlessly and painlessly.
- Why do we save money?
- Setting big and small financial goals.
- 3 steps budgeting method: Ghost money method
- Summary
Why do we save money?
The Main Reasons Why We Save Money
- Preparing for Future Plans: Education fees, marriage, childbirth, retirement.
- Saving for Emergencies: Unexpected job loss, injury, accident, illness.
- Buying What You Want: Furniture, travel, a new phone, etc.
- Down Payments: Purchasing a house, car, etc.
- Investing: Stocks, real estate, government bonds.
- Financial Independence: Living off the income from assets, having enough savings to not need to work.
- Leaving Assets for Family: Ensuring financial security for your loved ones.
Setting big and small financial goals
Build Specific and Realistic financial goals: ‘Being rich’ is also goal but it’s very vague goal, which is difficult to put into action. If we want to achieve goal, we have to set specific and realistic goal. For example:
- Put aside 1000 euro every month for investing for financial independence in 20 years
- Saving 6 months of living cost as a rainy day fund in 3 years:
- Prepare 20% of house purchasing cost (128,000 euro) as a down payment in 10 years.
Points are ‘Number‘ and ‘Specific Reason‘. Number is such as ‘how much’ and ‘by when’. Specific reason would be motivation to continue saving. But we, human beings are not good at keeping motivation for big and long goal.
So, key point is put small goals and achieve little by little. We feel fulfilled when we achieve small goals and it becomes next motivation. For example:
- Reduce basic expenses 100 euro and move it to saving account (1200 euro/year)
- Saving 6000 euro in 6 months
- Increase saving rate from 5% to 10%
3 steps budgeting method: Ghost money method
To save money, budgeting is necessary. Let’s budget by following three steps.
1. Understanding Your Current Financial Situation
First, I would like you to calculate your current ‘Basic expenses’ and ‘Comfortable expenses’ as described in the following post.
2. Calculate the Percentage of Expenses Out of Income
Next, let’s calculate the percentage of your expenses out of your income after tax. If you are spending over 90%, congratulations! You have a lot of room for improvement. If you are spending less than 75%, you are amazing! Congratulations, you don’t need to read any further (just kidding)!
Percentage of expenses=(Total expenses/Total income after tax)×100
3. Optimise Living Costs to Improve Saving Rate
Did you know that increasing your saving rate by just 5% can shorten your time to retirement by almost 5 years (Early Retirement Calculator)?
- Saving rate 20% -> 36.7 years to retire
- Saving rare 25% -> 31.9 years to retire
- Saving rate 30% -> 28 years
It depends on your decisions and what you value in life, so only you can decide your saving rate. If you want to improve your saving rate, you can check the following post and optimise your expenses!
After you decide on your budget and saving rate by improving your expenses, let’s maintain the decided budget using the Ghost Money method!
Ghost money method:
Deduct the amount you want to save immediately after receiving your income and live as if that money didn’t exist from the beginning.
It’s very simple but really powerful. Automatically transfer the amount you want to save immediately to a savings or investment account, and live with the money that remains in your daily account. You don’t have to think about saving anymore; you just live with the money you have in your pocket (daily account)!
Yes, I understand. It’s the same for me. In this case, you can create a buffer account (such as a rainy day account) from which you can withdraw money for unexpected expenses. Then, you can keep your other savings in an account that you cannot touch. In summary, we can prepare three accounts:
- Daily Account: You can use this account for daily expenses.
- Buffer Account (Rainy Day Account): For emergency expenses.
- Savings/Investing Account: You cannot touch this account until you reach your set goal.
Summary
- Understand Your Financial Situation: Categorize expenses into basic and comfortable. Calculate the percentage of expenses out of post-tax income.
- Improve Saving Rates: If expenses are over 90% of income, there’s room for improvement. Spending less than 75% of income is ideal.
- Use the Ghost Money Method: Automatically transfer savings to a separate account. Manage finances using three accounts: Daily, Buffer (for emergencies), and Savings/Investing.
