Before we look at how people can save money, it’s useful to first address the question of why people should save money. Often, people get into the habit of spending every last dime that they have and they may derive happiness from the lifestyle this affords them. Many go beyond the last dime and start spending money that they don’t have, thanks to the availability of credit cards, overdrafts and loans. The problem with this spend now, pay later mentality is that it is entirely focused upon the present and fails to take account of future financial and lifestyle needs. It can also leave an individual or household very exposed if they hit any sudden bumps in the road, such as redundancy, emergency medical care costs, or the prospect of pay freezes.
Saving money is therefore an important way in which people can both safeguard themselves from any nasty sudden surprises and start to build for a better future. In particular, most of us hope one day to be able to afford a comfortable retirement and would like that retirement date to be as soon as possible. Saving and prudently investing money, over a prolonged period of time, is a much better way to achieve such goals than simply hoping that you will somehow muddle through or win the lottery!
Plan to save through budgeting:
Saving money doesn’t happen by chance, so the first step for the would-be saver is to plan how they are going to save money. This process is best facilitated by setting up a budget. A budget is just a process where you identify how much you are currently spending, how much money you have left over and through which you then set targets on how to reduce spending and increase the amount of money put into savings and investments.
Pay yourself on pay day:
The well intentioned desire to put money into a savings account can be derailed by the temptation to spend any surplus funds. A good way to guard against this is to transfer money across from your checking / current account to your savings accounts on pay day. Once that money is safely ensconced within your savings account, hopefully this will reduce the likelihood that you will then spend that earmarked money on other things. You can either set up a regular standing order from your checking / current account to your savings account or can simply facilitate the funds transfer via online banking or mobile phone banking.
Make saving a habit:
For many people, lodging money into a savings account is something that they remember to do once in a blue moon. Then, guiltily, they transfer as much money as they can afford at that moment in time. Ad hoc saving is not a very effective means of building up a sizeable nest egg, however. It’s much better to put money aside every month so that it becomes something that you just do without needing to think about. Those who succeed in making savings a habit stand a much greater chance of achieving their long-term financial goals and the monthly practice of saving will become much less arduous.
Think about ways to reduce costs:
You can only save money if your monthly costs are less than your monthly income. A key part of your savings plan, therefore, is ensuring that you keep your costs low and that you have a surplus of cash at the end of each month or pay period. Your budget should include targets on various spend categories, such as travel, entertainment, and groceries. Being focused on getting value for money in every purchase you make can free up a lot of additional money that can be used to boost your savings balance.
Ensure you get a good rate of return:
Putting money aside regularly requires discipline and a little sacrifice, so you don’t want your assiduous efforts to be undermined by a savings account that offers a lousy interest rate. Make sure that you have shopped around and obtained an account with a competitive rate and that you’ve considered the balance that you want between putting money into low-risk savings accounts and investing money into higher-risk (but potentially higher return) investment instruments such as shares and unit trusts.