Catchy headlines, Quotes about making big savings and getting rich are so fun to read. But reality is different. In the USA, $65000 is the average savings amount. Does that sound big? It sounds bigger than it actually is. Savings are for dry days, right? How many days? For a family of 2, $65000 isn't enough for even 1 year.
In todays' blog we will discuss savings. Why is the savings amount not increasing as planned? By the end of this discussion you will be saving at least 25% more per month. Your savings will be doubled within the next 02 years. No equations, no complex ideas. We will discuss real stories and dig the secrets of the rich people out.
The Concept of Savings
Let's go back to the earliest days of the human race. We humans used to live hunter-gatherer life. We gathered, we ate, we slept. With no advanced technology, extremely helpless in front of the natural powers like rain, storm, cold, and predators , we had no choice but to run restlessly for food.
In that stage of human evolution we humans developed the idea of saving for the bad days. In many archeological sites dried fruits and cookies made by wheat like crops are found. This preservation indicates our earliest efforts to save.
What is Savings?
Savings refers to an amount of stored wealth. To use this wealth in the future. There are complex definitions, hundreds of publications, thousands of hypotheses about "Savings".
Simplest way to understand, The concept of savings is generated from fear. The fear of an uncertain future. Real financial literacy makes our brain develop hypothetical scenarios of tough days. If there is no or little knowledge about how financial things work, there will be no assumption consequently no fear.
Without this fear you will end up barehanded. The concept is very simple. Today I am young, the day is sunny, the company is running well, and my business is getting more attention. But tomorrow may not be the same as today. Eventually I will retire. I will grow older and weaker. Unable to work hard like today.
Why Savings are Important?
Human mind is incredibly capable of forecasting events in the future. It gathers experience from the events happening around. These experiences have taught human, earnings wouldn't be equal throughout life. Some days are secured and comfortable, while some days may come with difficulties. With financial crisis.
This is the reason humans have the instinct to save. Modern finance has opened the opportunities to make savings that are larger in amount and much more efficient for future use. Just like any other concept, the concept of "savings" also has delusive sides.
The less you spend from your today's income the bigger your savings amount will be. This is the primary misconception about savings. If you find yourself struggling to pay your bills, there is no question of savings. Savings are related to net income. Not the expenses. Earning better can make the savings amount larger.
For instance, Mr. Mike, Senior financial advisor for a multinational company, makes around $60k per annum. He spends more than $40k for his livelihood. Another $20k is his savings. While Mr. Mack, a taxi driver, makes only $12k annually (estimated by monthly income $2K), has a debt of $5k, the money he borrowed from a mutual fund.
Mr. Mike is about to start a financial advisory company, with his $100k savings. He saved it for the last 10 years. He is expecting to make $100k annually, he would be saving $40k annually. He has ambitions to be the owner of a group of companies within the next 10 years.
Mr. Mack is looking for another credit option for his son's student loan. He is very worried about his existing debts and his son to carry out the premiums of this loan as a financial burden for upcoming years.
Mr. Adrew, a friend of Mr. Mike, lived a lavish life in LA. Made $130k annually he owned a limited edition vehicle last year. Cost him $70k, nearly all of his savings were deployed. This week due to the economic crisis, the trading company he used to be CFO, has rolled up their business. Being jobless, Mr. Andrew is looking for a buyer to sell his car. Many came to see and take a test drive, but nobody made a last promise to take it. Mr. Andrew is asking $50K for his car, which is considered very high for a pre-owned car by the customers.
From these scenarios, we can easily understand the importance of savings and the impact of income on savings amounts. It is very important to understand, while your income plays an important role in your savings, understanding the importance of savings is also crucial. Planning for a better future can be your primary fuel to make sufficient savings.
Why You Can't Save Money?
Savings depend on three primary things, your income, your spending behavior and your intentions. All these three should be aligned with balance for useful savings. If your income is less than your expenses you can not save, if you are spending irresponsibly you won't be able to make savings. Above all if you don't have intentions to increase savings it will never increase. Here one thing is very important to consider. As a writer I am not demonizing or prioritizing any of these behaviors, we are just discussing the reasons.
Your Income Plays Crucial in Your Savings
If you are making more than your expenses, you are more likely to have better savings. And if you are earning equal or less than your needs, you are less likely to save. To make a better budget for your expenses plays a crucial role. It is easier for anyone to find out which expenses are unavoidable and which are luxuries. Cutting up these luxuries from your expenses may help you to increase your savings.
"What is Luxury" the question itself is a broader topic to discuss. In short, any routine consumption that is not necessary is a luxury. For instance, enjoying a family roaming to a nearby amusement park at the weekend can not be considered as luxury, this is an occasion to spend time with your family, not a routine behavior. Understanding the line in between needs and luxury is the key to making a proper budget.
Your Savings Depends on Spending Behavior
Your spending habits are how you normally use your money. This includes both spending money and saving it. If you are spending 100% of your income you will end up bare handed with no savings. If you don't spend even 10% of your income that is also impractical. Balance your lifestyle with your income. Understanding some disorders may help you to understand this clearly,
Compulsive Buying Disorder vs Your Savings
Purchasing things repeatedly without specific need is referred as compulsive buying disorder. 5.8% of the US population is suffering from this. Up to some limit it is caused by genetics and socio-economic circumstances. Capitalism, ad fatigue, dissociative identity disorder may change your spending behavior significantly.
Big companies have more power to advertise their products today. There are multiple channels like social media, emails, Google ads. Continuously seeing the same ad several times in a day creates an illusion in the human mind. This is called ad fatigue. Other disorders like dissociative identity disorder may make a person feel like buying things will make him more important to others.
Addiction vs Savings
Being addicted can destroy savings. Addictions like alcohol addiction, and abuse of CBD make anyone spend frequently. A study shows that illegal drugs have a mammoth industry size of $300BN. Imagine how much money is being wasted each year by individuals. These amounts could be saved frequently. Addiction destroys your financial behaviors.
Wrong Investment Destroys Savings
Unidentified risks, wrong assumptions, and manipulation of financial data cause wrong investments. If you're investing your money without proper knowledge of the business or just investing without proper documentation, you are more likely to lose your savings.
How To Save Money for Better Savings?
Intention to make better savings is the foremost of all of your savings efforts. Even if your income is not that great still you can save, by developing a better budget. Budgeting is the process of determining how much money will be spent on anything that is needed. Effective budgeting is a skill that can increase your savings amount dramatically. Some steps to follow for increasing your savings are,
Make Your Budget
Make a list of your obvious expenses. Expenses like food, clothing, home, education & medical expenses. Remember making an unrealistically tight budget doesn't increase your savings. It may backfire. So try to be realistic and specific. Figuring out what is important, is crucial for making your budgeting effective.
Create Income Sources to Boost Your Savings
If your income is equal to your expenses, you won't be able to increase your savings. Try to find out legit income sources to increase your income. Have determination to earn and save more. If you start spending more as fast as your income increases your savings will not increase. Remember, spending is a behavior. You must have seen some people in your life have million debts, still spending irresponsibly. Spending irresponsibly is a habit that destroys financial stability.
Open A Savings Account
This section may sound very typical. But it is true that having a savings account fuels your determination. We humans like to count. Did you know why Facebook notifies the users about how many people liked their contents? To keep audiences engaged by counting the numbers. Same applies for your savings account. Once you start to save money, the figures will work as your financial advisor to find out where the expenses can be lessened up.
Insurance for Savings
Accidents like natural calamities, fire accidents, theft and so many others can damage your investments. These damages will impact your income negatively. As well as your savings amount. Insurance is a process to keep your savings safe. By fighting against any financial difficulty caused by such accidents. It keeps your investments secure and stabilizes your overall sustainability.
Hire a Better Tax Lawyer for Increased Savings
Taxes can take a big chunk of your income, with rates reaching up to 37%. While a good tax lawyer can help you save money and boost your savings, it's important to consider the cost of their services before committing to a long-term contract. Weigh the potential savings against the lawyer's fees to see if it makes financial sense for you.
Savings can be difficult to understand. Setting up financial goals are the key. Avoiding impulsive shopping, building an effective side income portfolio, staying out of addiction is the key to build up an efficient spending behavior. Budgeting your expenses enhances your savings efforts. Open a savings account in the earlier stages of your career. Ensure your assets are safe in unexpected situations. Savings can make your financial portfolio better day by day. Even if you want a loan or credit card financing companies will figure out your credit scores. Your credit score is directly related to your income and spending behavior. In one of our next blog posts we will be discussing this.
10 FAQ's About Savings
1. Why is saving money important?
- Financial Security: Savings provide a buffer for unexpected expenses and emergencies, preventing debt accumulation.
- Goal Achievement: Saving allows you to reach financial goals like retirement, a down payment on a house, or a dream vacation.
- Peace of Mind: Having a savings cushion reduces stress and anxiety about finances.
2. How much should I save?
The ideal savings amount depends on your individual circumstances and goals. However, many financial experts recommend aiming for 10-20% of your income after taxes.
3. What are some good savings strategies?
Track Your Spending: Create a budget to identify areas where you can cut back and free up more money for savings.
- Automate Savings: Set up automatic transfers to a savings account to ensure consistent savings contributions.
- Set SMART Goals: Define Specific, Measurable, Achievable, Relevant, and Time-bound savings goals for motivation.
- Pay Yourself First: Treat savings like a bill you must pay before spending on other things.
- Find Savings Opportunities: Explore ways to reduce expenses on everyday costs like groceries, dining out and entertainment.
4. What are safe places to save my money?
- Savings Accounts: Offer guaranteed access to your funds with a low but secure interest rate.
- Money Market Accounts: Similar to savings accounts but may offer slightly higher interest and limited check-writing privileges.
- Certificates of Deposit (CDs): Offer a higher interest rate but require you to lock up your money for a fixed term.
5. How do I stick to my savings plan?
- Track Your Progress: Monitor your savings regularly to stay motivated and see your progress towards your goals.
- Celebrate Milestones: Reward yourself for achieving savings milestones to maintain momentum.
- Minimize Temptations: Avoid unnecessary shopping trips or impulse purchases that could derail your plan.
- Review and Adjust: Regularly evaluate your budget and savings goals, and adjust as needed based on your income or life changes.
6. What are some common saving myths?
- Myth: You need a lot of money to start saving.
- Fact: Even small, regular contributions can grow over time with compound interest.
- Myth: Saving money means depriving yourself of everything you enjoy.
- Fact: Prioritize your needs, but allocate some funds for discretionary spending to avoid feeling deprived.
- Myth: High-interest savings accounts are risky.
- Fact: Savings accounts are typically insured by the government up to a certain amount, protecting your money.
7. How can I save money on groceries?
- Plan Your Meals: Plan your meals for the week and create a grocery list to avoid impulse purchases.
- Shop with a List: Stick to your grocery list and avoid unnecessary items.
- Consider Store Brands: Generic store brands often offer the same quality as name brands at a lower cost.
- Utilize Coupons and Deals: Look for coupons and promotional offers to save on groceries.
- Cook at Home More Often: Eating out can be expensive. Cooking at home provides more control over ingredients and portion sizes, saving money.
8. How can I save money on housing costs?
- Shop Around for Renters/Homeowners Insurance: Compare quotes from different insurance companies to find the best rates.
- Negotiate Rent: If you're renting, try negotiating with your landlord for a lower rent or concessions.
- Consider a Roommate or Downshifting: Sharing living space with roommates can significantly reduce
9. What are some ways to save money on entertainment?
- Explore Free Activities: Look for free or low-cost entertainment options like visiting parks, and museums on free admission days, or attending local events.
- Borrow or Rent Entertainment: Borrow movies, books, or games from libraries instead of buying them new.
- Consider Alternatives to Expensive Entertainment: Instead of expensive outings, consider hosting game nights, potlucks, or movie nights at home with friends.
- Utilize Entertainment Subscriptions Wisely: Review your subscription services to see if there are any you can cancel or consolidate.
10. What resources can help me learn more about saving money?
- Government Websites: The Consumer Financial Protection Bureau and the U.S. Department of Agriculture provide valuable resources on saving money and financial planning.
- Financial Apps and Tools: Many budgeting and savings apps can help you track your spending, set goals, and make informed financial decisions.
- Financial Blogs and Websites: Credible financial blogs and websites offer a wealth of information on saving strategies, budgeting tips, and personal finance management.
