Establish your Savings Roadmap

Thinking differently about savings

You work hard for your money, and your reward for that hard work is being able to spend the money you earned on things that make you happy. But at the same time, you don’t want to spend all your money. If you have nothing in reserve, it’s impossible to build and grow your savings. And savings can buy you options in life. The key to saving is to spend less than you earn. Sounds simple, right? With the rise of gig and contract work around the world, it can take real work to get your income to a point where you can consistently save. But there are many good reasons for you to do so.

First, savings allow you to get through unforeseen financial emergencies. A savings buffer will help you ride out bumps like unexpected bills or job loss.

Second, you need savings to buy expensive items, like houses, cars, or tuition for your children’s education. With all of these big-ticket items, even if you’re going to borrow to pay for them, you usually need to put up a deposit or fund part of the cost yourself.

Third, you need to save for when income stops. This is particularly important in retirement. If you don’t have income coming in, you’ll need to tap into savings to pay for expenses. And in most countries, even with social programs that offer income when your work stops, these generally are not robust enough to pay all of your expenses.

Finally, there’s the peace of mind that savings offer. Financial stress is one of the largest sources of hardship for most families and one of the most significant sources of stress globally. Having enough savings to get through tough times and having the means to easily navigate those critical financial milestones like buying a house or sending kids to college can be liberating.

Here’s one life-changing trick. Don’t save what you have left over after spending; instead, flip your spending priority on its head. Spend only what you have leftover after saving. Make saving a priority. Make it a goal. Set a defined number. Pay yourself first. But don’t stop there. Give your savings goals a purpose. Quantify your dreams, and save for reasons like a house deposit or a new car. When you have a strong purpose for your savings, it can help keep you on track.

Create a budget plan

The ability to access, view and share your financial data has improved significantly over the past decade. One of the great benefits is that budgeting is now considerably more accessible. Some apps automate your savings, categorise your expenses, and even give advice on what you could be doing better, so maybe it’s time to revisit your approach to budgeting.

A reasonable budget will help you live within your means, get out of debt, cushion for unexpected expenses, and save for bigger things like cars, tuition, or a home. There are different ways to budget, from a notebook and pencil to an Excel spreadsheet to any number of apps. By now, your bank should be offering money management tools too. But regardless of how you budget, the fundamentals are similar.

First, and most importantly, set a savings goal. To begin with, you can make it modest, but set an amount that you can set aside each month and don’t spend.

Next, look at your take-home pay and subtract your savings goal. You have left the amount of money that you can spend every month. Look at your transaction history over the past few months. Again, most apps will do this for you. See where your money is going by category. Look for the big ones; food, rent, car payments, clothing, transport. Don’t forget interest payments on credit cards and loans, either. Be as thorough as possible. Think through ways that you might want to right-size your budget and optimise your savings, and set a target amount for each category. Make it reasonable. Leave yourself a little bit of wiggle room if you can.

Finally, double-check that the total from all the categories does not add up to more than what you’ve allocated to spend each month. Keep track of your budget. As the months and years go by, this will become second nature, and you’ll get to know your financial life much more intimately. A budget is a foundation for a long-term financial plan. In the words of Eleanor Roosevelt, “It takes as much energy to wish as it does to plan.”

How to grow your savings

Once you have reached a point where you can consistently put some money away, you need to start thinking about what to do with all of that savings.

The first thing you need to think about is an emergency fund. Things happen that are beyond your control. What would happen, for example, if you lost a job, had unexpected medical bills, or the economy hit another downturn? It’s essential to have some money put aside just in case. The best thing you can do is put away six months’ worth of expenses. It may seem like a lot of money, but if a crisis hits, you’ll be glad you did, keep this money where you can access it readily, like in a savings account.

The next thing you should do is make sure you aren’t carrying any high-interest debt. I’m talking about credit card debt. The interest rate you pay on your balance can suck money out of your savings. If you have money saved, think about using it to pay down this debt so you can release yourself from those interest payments and keep that extra cash for yourself.

Next is saving for long-term expenses, like a car, a house or education. These are big-ticket items, and they take time to save for because you won’t need to access the money until you reach your target; you can keep this money in less accessible but higher-earning accounts, like a fixed-income fund.

Finally, if you’ve checked all the boxes and still have money saved, look to invest in it. You worked hard for your money. Investing your savings puts your money to work for you and will hopefully grow it over time. You’ll need to put this money into an account with a broker or advisor where you can buy stocks, bonds, or funds. Just make sure you pick the risk of the investments that suit your personal preferences. You don’t want to lose your retirement savings or house deposit on a super risky investment. So, make sure you put your money to work for you. A little bit of work can go a long way to getting you to your financial goals.

Savings vs debt reduction

One of the most significant difficulties when you finally can save is what to do with those savings, especially if you also owe money.

Do you save to build up a nest egg, invest those savings to make more money, or do you pay down debt?

First and foremost, you need to consider how expensive your debt is. And this depends entirely on the interest rate and fees you pay. The higher the interest rate, the more critical it is to prioritise paying down that debt.

Let’s look at an example of what that means. Let’s see what happens if you take $1,000 and pay down your credit card debt. First, let’s assume that the interest rate on your credit card is 24%, which is a pretty standard rate. If you pay down your balance by $1,000 and keep it down by $1,000 for the year, you save $240 in interest payments. But remember, your decision needs to be a comparison of options. You have to look at paying down debt versus what you would do with your savings.

So let’s look at the other side of the coin. What if you saved that money instead, and specifically, what if you invested it? Well, on an average year, and it can be higher or lower than this on any given year, an 8% return is reasonable, giving you $80 on that $1,000 investment. So on a purely mathematical comparison, paying down your credit card debt makes more economic sense.

Secondly, evaluate hidden benefits to savings. If, for example, you have no money in savings, you’re seriously exposed to sudden financial emergencies. So even though paying down your debt may look better on paper, getting some cash stashed in your bank account will give you some breathing room before tackling your debt. So economics is only part of the calculus.

Thirdly, you have to look at what underlies the debt. Debt that pays for things of value, like an annuity plan with premium financing, is considered good debt because they have low-interest rates. So there’s often no urgency to paying off good debt.

Finally, you also have to consider compounding when saving your money. In our example, your $1,000 stock investment became $1,080 at the end of the year. The following year, that same 8% will earn you $86. You made money on your money. This compounding is the bedrock principle of growing your savings. And the earlier you can start, the more you will increase your savings in the long run. So make sure you compare your debt and savings options and make sure you include the intangibles. But remember, in the end, whether you save or pay down debt, both are excellent options when you have the money to do it.

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