Most people don’t understand that…it’s not about how much money you make. It’s about how much money you keep.
– Robert Kiyosaki
A simple fact that is hard to learn is that the moment to save money is when you have some.
– Joe Moore
The habit of saving is itself an education; it fosters every virtue, teaches self-denial, cultivates a sense of order, trains forethought
and so broadens the mind.
– TT Munger
A penny saved is a penny earned.
– Benjamin Franklin
SO YOU THINK SAVING IS IMPOSSIBLE? NOPE. YOU CAN DO IT TOO!
The secret to financial success is to spend what you have leftover after saving, instead of saving what is left over after spending.
– Robert Allen
Well, the truth is: you can if you know-how. And that’s exactly what we’re going to look at now. In the next couple of chapters, we’ll teach you everything you need to know about saving.
Saving: a curious word. For many of us, it’s been a chore to do since we were kids. But think how good it would be to have listened and acquired that habit when we were young! Everything would be so much easier now.
So what is saving? We could define it as the ability to keep aside part of our income to use in the future, whether to achieve a dream, treat ourselves, supplement our pensions, or simply have a buffer for any surprise circumstances. Whatever it’s for, savings are another fundamental part of our finances.
Saving journey is something we subconsciously do even as children. We’ve all saved up to buy a game, a team jersey, a pair of sneakers… But as we get older and we have to take on responsibilities and expenses, saving becomes an uphill struggle. We get to a point where it seems impossible, utopian.
To help us do it, different methods of saving have been developed throughout history. The methods we’ll look at now have one thing in common: with the modernization of payments and the decrease in the use of cash, they are now outdated. But it’s still interesting to take a look at them.
Spare change method. This consists of keeping a big piggybank and adding to it periodically over time. There are a couple of variations:
Putting in all coins of a given value. For example, saving all your 5c coins.
Putting in all the loose change you have left at the end of the day.
Envelope method. At the beginning of every month, gather up all the cash you have and put it into envelopes. Each envelope is to contain money earmarked for specific costs, starting with fixed costs. Then, at least 10% of the money left over goes into savings. The rest is used for other costs.
Cash change method. This is based on making all payments in cash. 10% of each payment is separated and placed into a piggy bank or savings account. This method is very tedious to carry out manually, which is one of the main reasons why it fell out of use.
However, thanks to new technology, new tools have come about for automating similar savings methods, such as the rounding-up method. Apps such as Goin allow you to round up every amount you spend to the nearest whole amount, and that extra goes into a savings account. Since that amount seems like part of the cost, you don’t notice it, which makes saving really simple.
Nowadays, when we ask people how much they save each month, they reply: “How am I supposed to save anything with what I make? I can barely make it to the end of the month!” And that’s understandable. Everyone’s situation is different. But if you really want to, anyone can do it!
Now we’re going to look at some modern methods. We’ll start with the ones we don’t recommend, either because they are not very effective in the long term because they can distract you from your goal, or for other reasons. Let’s take a look!
WAYS OF SAVING THAT GET SOLD TO US…
The quickest way to double your money is to fold it in half and put it back in your pocket.
– Will Rogers
Nowadays there are so many methods of saving; only a few among them are very well-known. We’ve chosen a couple that, either through our own experience or through that of clients or friends, didn’t yield the results we’d hoped. Let’s look at why:
The 30-day method. This enables you to save a chosen amount of money over the period of a month. It works through a progressive savings formula over 30 days, which begins with a deposit (D), for example, $1 the first day, $2 the second day, $3 the third day, and so on until you deposit $30. This way, at the end of the month you will have $465 saved up. The formula for calculating it is Monthly saving = D x 465. If you increase or reduce the value of D, you will save more or less money respectively.
Example 1 (D=0.5): 0.5 x 465 = $232.50 in savings.
Example 2 (D=2): 2 x 465 = $930 in savings.
Now, let’s take a look at the reasons we don’t recommend this method of saving:
It’s used as a quick way of saving for certain expenses. This doesn’t help you develop a habit of saving, and it ends up being used more on wants than on necessities. That’s the opposite of what we hope to achieve.
It’s very time-limited. Every month you have to start from scratch, and it’s not automated.
Also, if you’re too ambitious and choose a D variable that is too high, you won’t be able to keep meeting that saving as the days go on.
52-week method. This comes from Anglo-Saxon culture, where salaries are often paid weekly rather than monthly. It consists of depositing $1 the first week, $2 the second week, $3 the third week, and so on until the last week when you make a $52 deposit. This leaves you with an annual saving of $1,378. We don’t recommend this method for the following reasons:
It’s not automatic, which makes it harder to do.
It’s easy to do for the first few weeks, but as the weekly amount goes up, it can get harder.
It’s limited to a one-year period.
So, it may make sense in places with weekly salary payments. In that case, it would be the equivalent of the pre-savings method which we’ll look at later. However, in countries where payday is monthly, it becomes much less useful.
Due to the above reasons, these methods aren’t advisable when it comes to helping you save, even though they may seem effective on paper.
Now, let’s move on to the next section. You’re going to love it! We’ll give you some very simple solutions to help you save from the very first day with some ideal modern methods. Let’s go!
THE BEST METHODS FOR STARTING TO SAVE
“Buy only what is necessary, not what is convenient. What is unnecessary, even if it costs one cent, is expensive.”
So far, we’ve looked at the main methods which are now obsolete and at modern methods which aren’t ideal when it comes to saving. But there are still some we haven’t looked at yet. Now, we’re going to talk about the best methods for starting to save. These are really simple and effective, especially if you’re just starting out, so read carefully!
Pre-saving method. This is based on the “pay yourself first” principle from Robert T. Kiyosaki, author of the bestseller Rich Dad Poor Dad, and it’s become universally known for its efficacy. It means that the first thing you do when you get paid is paid yourself the portion you want to save, and after that, pay for everything else. Burn that onto your memory! Because this phrase alone is going to make a big difference to the way you think about saving. This method has a couple of very clear and simple key steps to follow:
- Set up an automatic transfer to a savings account every month for the amount you want to save. This should take place straight after you get paid. Remember: pay yourself first!
- Start with an easy amount that you feel comfortable with. You can increase that little by little as you reduce your spending or get new income sources. Your aim is to save at least 10% of your gross income every month.
- Savings for the first few months will be earmarked for your rainy-day fund. Once you’ve got this to a point where it could cover all your costs for three months, you can move on to the next stage.
- Now you can start to divide your savings:
- You can use half of what you save each month to increase your rainy-day fund until it could cover your total costs for 6 months. As we said before, this is ideal in order to be able to face almost any unforeseen circumstance.
- You can then use the remaining half of what you’re still saving every month to make some long-term investments. Choose ones that offer greater returns without excessive risks, such as for example, deposits.
- Once your rainy-day fund is complete, the portion of savings you were using for it will be freed up. You can start to use it for greater risk investments, which offer bigger returns, such as investment funds or stocks and shares.
And just like that, you will have completed your rainy-day fund as well as begun investing for the future. It may seem impossible, but if you follow these steps, you’ll start seeing results sooner than you think.
Same-salary method. This one is pretty different from the ones we’ve looked at – it doesn’t bring much regularity in terms of savings, but it’s a good way to complement the above method. It consists of always maintaining your base salary, and separating out any incentives, bonuses, overtime, and so on. All these add-ons should go straight into your savings account. Since they’re a variable you can’t always count on getting, you won’t miss them day-to-day. This method works well alongside pre-savings. It can help you fill up your rainy-day fund faster, and then later, perhaps you could use that extra pay toward a pension plan to safeguard your retirement.
ADVANCED SAVING METHODS
“Keep adding little by little and it will become a big heap.” – Hesiod
Finally, let’s take a look at the world’s most popular complex savings methods, and how they got to be so well-known. The three we’ve chosen have a few features in common:
They yield good results over time.
They can be automated, which makes them much easier to carry out in our daily lives.
They’re unlimited since they have no start or end and can be adopted as lifelong methods.
Even though they are a little more complex, they have clear and simple structures which, if followed correctly, will help you get great results over time.
Now that you know how they’re similar, let’s look at what each of them consists of and their main differences.
The 50/20/30 rule. This rule was created by Elizabeth Warren and appears in detail in her book All Your Worth: The Ultimate Lifetime Money Plan, and is also known as the balanced money formula. The method itself is pretty simple. What makes it more complex is that to get good results, you need to be clear on the differences between the various types of expenses, and know how to limit the use of your savings to truly worthwhile things. You can’t get swept up by sentimentality, since having so few differentiated categories means the risk of getting it wrong goes up. Let’s take a look at how the categories are divided up:
Needs: This is where 50% of your income should go. This mainly includes costs you can’t eliminate, such as rent, food, or utilities.
Savings: This is where 20% of your income should be going. It’s a little ambiguous, as we mentioned above. This includes things like your rainy-day fund, debt repayments, investments, or dreams you want to fulfill.
Wants: Finally, the remaining 30% can go here. This can be used for things like leisure, gifts, and trips.
As such, while it’s one of the most popular methods, it has so few categories into which to separate our expenses that it’s easy to trip up. This is something of a downside.
The Kakebo method. This is perhaps the oldest known method of saving. It was created by Motoko Hani, who, in 1904, was inspired by the ways Japanese housewives saved up. Despite its age and the fact it is an analog method based on a savings book full of balance sheets, it has been so successful that even today it’s still one of the favorite methods of great economists. Its book comprises five sections:
- Income: here, note down all of your monthly income.
- Fixed costs: in this section, but all of your regular costs (annual, monthly, and so on). This would be rent/mortgage, groceries, utilities, gym, and broadband.
- Savings: you should decide on a monthly savings amount to put in this section.
- Budget: the next step is to calculate how much money you have left for occasional costs. What you need to do is keep reducing this part as much as you can so that you can increase your savings.
- Balance: finally, do some balance sheets periodically to check that you’re achieving your aims.
This method’s efficacy lies in the fact that once you’ve completed all these steps, you have greater control over each category and you’re much more aware of where your income is being spent. Additionally, you’ll see if your monthly expenses are stable or if there are a lot of ups and downs, which would mean you need to reduce your unnecessary costs to get things looking more regular.
The T. Harv Eker method. This method, named after the author of the bestselling Secrets of the Millionaire Mind, is based on the division of your income into six main “jars” or accounts. This larger number of categories may seem more complex, but it will actually help you work out which section each expense goes in. Let’s take a look at the categories.
- Necessities: 55% of your income should go in here (rent, groceries, utilities, and so on).
- Long-term savings for retirement: 10% of your income will go on property or financial investments, business, and so on.
- Education: another 10% on books, seminars, online courses, and similar.
- Play: 10% for restaurants, movies, and other treats.
- Special purchases: another 10% of your income will be earmarked first for your rainy-day fund and then for large purchases (bikes, cars, phones, home appliances, and others).
- Giving: the remaining 5% can be used to boost your money’s potential. After all, you reap what you sow (gifts for friends, charitable donations, community or church support, and the like).
These are the main methods of saving used nowadays. It’s up to you which one you try: we recommend you start with one of those we recommended. Later, you can try a more complex method.
Now, we’re going to analyze some of today’s most useful and accessible tools to help us in this area: savings apps.
OUR BIGGEST ALLIES: SAVINGS APPS
“Managing your money well gives you true independence and freedom, as well as indirectly making things better for humanity as a whole.”
– Gregorio Hernández Jiménez
With our fast-paced modern lives, we barely have time to invest in controlling our finances. This means we need an ally that can carry out all the processes involved in the best way possible to make our lives easier. Enter apps. With alarms, tips, and myriad financial options, they can help us get everything we do under control and automate almost any process we want to carry out.
App usage has exploded in recent years thanks to their usefulness, so there are more and more of them around. Now, let’s look at the ones we find most useful, intuitive, and comprehensive.
Goin. A Spanish app that lets you automate some of the savings methods we looked at earlier. Let’s take a look at some of the savings options it offers and how these related to the above techniques:
Round-up: every time you make a card payment, Goin puts the spare change into your account. This is the app’s most innovative feature.
Retention: similar to Kiyosaki’s “pay yourself first” pre-savings method.
Auto Top-Up: you choose a fixed amount that will be added to your account daily, weekly or monthly.
Penalties: an amount set by you is added to your account every time you make a purchase you’d rather avoid (for example, alcohol or cigarettes). This is a lucrative way to chastise yourself: another of the app’s novel features.
Group Goals: create a goal for you and others to save for together.
Fintonic. An app that helps you organize your personal finances. This platform centralizes all your bank, card, and insurance information in one place. Among its main features, it:
Let’s you access information on policies you’ve taken out.
Alerts you to any error or unusual activity on your cards or bank accounts.
Draws up personal loans.
Offers support from a mediator to help protect your interests.
Wallet. This app has functions similar to those detailed above, but with a particular focus on cloud support. All your information is synchronized, in terms of accounts, expenses, income, or savings, and is automatically saved in the app. One innovative feature is the ability to classify your expenses according to whether or not they were worth it. It’s so simple and could be so useful in the future.
Mint. This is one of the longest-running apps offering these types of services. It lets you set monthly saving and spending goals, as well as set reminders for upcoming payments. One of its most interesting functions is that it uses graphs to show you how your finances change over time.
ARNAB. The app’s name stands for You Need a Budget. YNAB is based on monthly budgets for finding the best way to manage your money. It saves you the job of making charts, Excel
spreadsheets or graphs to get a handle on your income, expenses, and investments.
Some of these apps also offer investment options for your savings as they build-up, so you can actually profit from them. We’ll look at this later, in the chapter on income.
Using these methods and tools, you’ll find it easy to start saving. As we said at the start of the chapter, no matter how small the amount you start with is, if you’re consistent, the results will take you by surprise. What matters is that you start right now!
CHALLENGE: SAVE AND ENJOY IT
Use the methods and tools you learned about in this chapter and set yourself a savings goal for the coming month. Divide this amount into four smaller objectives: one for each week. This will help you see if you’re meeting your savings goal, or if you need to get into gear. If you manage to achieve your aim, reward yourself using a portion of the money.
Another, even more, motivating option is to do this exercise in competition mode with friends or relatives. The winner will be rewarded using part of the other contestants’ savings (such as with dinner or a gift). You’ll all have a great time doing this, it’ll be a fun month and on top of that, you’ll improve your ability to save in the process.
- Saving is within everyone’s reach.
- Don’t give up if you can only start with a small amount: the main thing is to create the habit of saving.
- Use the methods we’ve shown you to achieve it, especially at the start. Try them and pick the one that works best for you.
- Remember: pay yourself first. This is the cornerstone of saving time.
- Use your first savings to create a rainy-day fund (which should contain the equivalent of your total outgoings over six months). Once you have this, you’ll be able to take on almost any unforeseen situation.
- The next thing you should do is use your savings to pay off any debts. The sooner you eliminate them, the less interest you’ll pay.
- Finally, once you’ve achieved all of the above, start investing in products with a good return. Start with something low-risk, look after your future, and diversify, so that you’re not putting all your eggs in one basket.
- Apps will be of great help when it comes to saving yourself a lot of work and gaining greater control over your finances.