If life trips you up, will you be ready? These days you never know when a job loss, medical emergency, or even a cavity will suck your bank account dry and shrivelled.
You know how important it is to build up an emergency fund, but you need extra money before you can save any money, right? You might be surprised about the answer.
I used to be there, treading water financially, every day.
There I was, making decent money at an office job, while my little sister, in college and working as a waitress, jetted off to Australia for a week because some friends were studying abroad, and she happened to have the money available.
I’ll bet you’re wondering if my sister is a stripper. But you’d be wrong.
As she tells it, all she did was look to her big sister’s example, and do exactly the opposite. Years later, she filled me in on her savings plan. Over the next year or so, I did as my kid sister instructed.
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We weathered two cars blowing up on us, loads of sick days from the toxic mold in our old house, two job losses, me having to go back to school full time, and more. While we live well below our small means at the moment, we still have plenty of savings that we haven’t touched. In a few weeks I will be done with school, and working full time again to feed the pig.
So how did we do it? It’s not easy, but it’s not hard, either. And once you get everything set up, five minutes per pay period is all you will need to start building your savings and living free.
Make your monthly budget
Mint.com is a free online budgeting tool, where you can keep track of all of your accounts, income, savings, expenditures and goals, all in one place. It even helps you identify money drips and possible savings.
One thing Mint doesn’t do is track the cash you’re holding in your hot little hand. It’s not that smart.
If you work for tips, it is absolutely imperative that you keep track of your income and spending. Either keep a little notebook with you, or keep track of it on your phone with a free tool like Evernote link. Be diligent about this for at least two or three months to accurately identify your income, spending and patterns.
This is what you need to know: How much money do you need to get through the month (we will call this Need Money). This includes bills, gas, food, pocket money — everything you spend. Be realistic and use Mint to tell you what you usually spend on these items.
Pay Yourself and Feed the Pig
To feed the pig (your piggy bank/savings), your Need Money has to be less than your income. If it isn’t, reexamine your budget and make some cuts. Do you really need cable? How about your daily Starbucks run?
For this example, let’s pretend you make $2,000 a month on average. Your Need Money is $1,800 a month.
That’s all you get. Because you know as well as I do, that last $200 is going to magically slip out of your fingers. Any money you make above and beyond your Need Money goes straight into savings.
That means that if one month you only make $1850, only $50 goes into savings. If you get a giant bonus, boom. Savings. Pretend that money does not exist.
Get set up for saving
Having a savings account is good. Having a bunch of them is better.
Think of it like the Titanic. It had 16 watertight compartments. It could have stayed afloat with four of them breached, but six flooded and Celine Dion made out like a bandit.
The same is true of your savings accounts. If you only had one account, it is really easy to drain your entire savings. Money spread over multiple accounts can keep you afloat.
INGDirect offers free online interest-bearing savings accounts. You can make as many accounts as you need.
So how many do you need?
Answer these questions: What do you want out of life? What do you need to save for? How important is each item to you? Do they have deadlines?
To give you a real-life example, this is how I manage my savings accounts:
- 20% Wedding – Deadline 8/31/2012
- 20% House – Deadline 12/12
- 10% Car – Deadline 12/2
- 15% Emergency
- 10% Savings
- 5% The Kid
- 5% Retirement
- 5% Vacation
- 5% Fun
- 5% Gifts
Remember that these numbers are not set in stone. As soon as the wedding, house and car are paid for, that 50% of our savings can go into other accounts instead.
Now let’s make this easy
If this all sounds tricky, here’s where it gets simple. All of the money you transfer over from your paycheck does not actually get split between all of those accounts.
It goes in your final account. I call mine “Distribution.”
Every time the Distribution account reaches $100, I split it up by the percentages into the other accounts.
So if 20% is going to the house fund, that’s $20. See how easy?
You don’t have to do this super often if you don’t mind some really basic math (if there is $500 in Distribution, then $100 goes into the house fund. If you have an odd number in the account, like $128.37, just work with the $100.)
This all becomes a game for me. I love to see how fast I can get to the next $100 so that I can fill my accounts some more. It’s a challenge, and it’s thrilling to watch your savings grow. Even $5 per pay period will get you started.
Now start saving!
Even though I make less money right now than I did back when the collection agents were calling me every day, I still have a sizable amount of money in my savings accounts today.
This process has taught me to live within my means and on a budget, while still living a real life. I budget for fun and vacations, and the things I want to do. And I know that if things go wrong, I’m ready.
Money is only worth so much, but peace of mind is priceless.
How is your savings plan coming along?
I’m a saver by nature, but here is my trick to budgeting. I work on commission so my paycheck fluctuates a lot. When I get my check, I subtract needs, and savings. The rest I divide by thirty, always thirty. Then I can see my daily budget. Ok I’ve got $17.44 a day. This is for anything that gets paid by debit or credit or cash including necessary expenses like gas and food. I can borrow from tomorrow or use yesterday’s surplus. But I can’t remember much more so I won’t spend much more. And it takes a lot of work to go add up the past 20 days, so I usually end up with even more surplus for the account. Maybe not ideal for a family but as a single person it’s never failed. And I can proudly say I am consumer debt free. I use my forgetful laziness to my advantage
I wouldn’t budget at all if it weren’t for online banking and having my checking, savings, credit card, and IRA in the same place. It’s an easy reminder when I get paid to go through my transaction and see how much I’m spending, put money into savings, and figure out how much I have. I ended up with a job that paid a lot more than I was used to having, and I had to try to figure out how not to blow all that money on silly things. One more thing I wish I’d learned in school: personal finance.
I’ve definitely learned that I have to set aside a small amount of money each month as “irresponsible spending.” If you have a little bit that is just for ridiculous things, 3 am pizza, a manicure- it makes saving and actually sticking to a budget much easier.
Another little trick I have learned is this: when I desperately need something I haven’t budgeted for (eg my work shoes kicked the bucket this week), rather than having to take the money out of my savings account and consequently rebudget the rest of the month, I look around the house and dig deep into the wardrobes to find stuff I don’t need/want/use. Then I just pop it on Gumtree (pretty sure you guys in USA have Craigslist) and I’ve learned that people will buy ANYTHING. Within a few days, that Ikea shoe rack that was sitting in my shed with an old pair of boots on it was SOLD for $15.
I have made so much easy money this way…in fact it’s pretty much free money. And it forces me to declutter and admit to myself that even though that $80 dress looked awesome at my cousin’s wedding, I’ll never wear it again, whereas someone else might pay $40 for it. Free money I tell ya!
One little “extra” savings trick that I am planning on implementing in the coming year is the 52-week savings challenge. So Week 1 you put aside $1, Week 2 is $2, and so on. By the end of the year, you have an extra $1378! It’s not a ton of money, but it’s something. I’m hoping to get my fiance to do it too, so we can double that amount.
I have something similar planned for after we make more than we need.
No, seriously, my student loans are more than my rent. Rent + Student Loans + Car payment leaves me with $50 to put towards food, gas, insurance, etc… I go in debt every month. Husband graduates in a year, then we start something similar.
Except we have a part for ‘debt’. Every month we will take that amount and put it to the highest interest rate loan… yep.
Good article!
In the not too distant past, my monthly expenses were $40 less than my net income; so I saved $40 a month. That was all I could do, but I did it anyhow! Now our financial situation is much better, and I’ve been able to build up our savings account with a few months living expenses, pay off student loans, add extra money to the principle of the mortgage every month. Being super poor forced me to learn to manage my money well, cuz if I didn’t, I’d have been up a creek without a paddle.
I made an Excel spreadsheet, instead of using a app or website like Mint; it works perfectly for me.
I realize this post has been around for awhile, but I figure this is worth a shot: Does anyone have any tips on budgeting money that you receive all at once, rather than monthly? I am a student and living off those loans I’ll be paying back soon. I’m really struggling to find advice on how to factor for a non-monthly income. Even sites like Mint assume that I will be gaining more throughout the next several months and that what I have now is just excess. I’ve read to divide it by 6 for how many months it will have to stretch (well, 4 or 5 really, a semester isn’t exactly six months…) and I do that, but it seems like someone out there has to know more than one thing to manage this kind of money! Surely “grown ups” go through a similar thing with tax refunds, right..?
Put the lump sum into a savings account and set up a standing order to pay yourself a monthly portion. Basically, pay yourself a salary with it. Ideally, try and divide it up so you’re not taking a full 1/5th each month, but leaving some behind as a savings buffer. Unless you have reason to believe you’ll get a job as soon as your last exams are done, that loan will probably have to last longer than the semester does.
Depending on how comfortable you are with having multiple accounts, you could set up multiple standing orders, so you have one portion going into a monthly bills account, another into a quarterly bills account, another into a food and essentials account and another into a pocket money account. Shop around for accounts that are harder to access for the bill accounts, so you’re not tempted to borrow from them (or just cut up the cards that go with the accounts). It’ll give you more confidence when you’re at the bar to know you can’t accidentally spend this month’s rent money as well, or if your card gets cloned it’s your fun money that’s gone, not your electric bill.