This is in Pursuit of Financial Freedom the Newsletter that focuses on the four foundational items to achieving Financial Freedom: Saving, Multiple Income Streams, Debt Management and Retirement. Welcome to the new subscribers and welcome back to our existing crew. Thanks for tuning in. If you are reading the newsletter for the first time, why not click the button below?
If you have friends that love to read and interested in learning something new that tests conventional thinking, then why not share?
Yes you read that right! HALF of your salary. I wrote this article originally on my blog with my real estate clients in mind. Now I’m sharing it here as well with all of you in mind. Saving is an important factor in the Financial Freedom Framework and is definitley possible with practice, diligence and time. Let me know in the comments what other saving tips you have!
When I graduated from college, I knew one of the things I wanted to do was buy my own place. Budgeting made that possible. And now two years later with my second property under my belt I know the only way I did it was cutting out unnecessary spending and saving half of my salary every month.
You may think saving HALF of my salary every month is extreme but from my perspective it has allowed me to craft the lifestyle I want to live. You are probably scoffing and thinking that I can do this because I have no life and no fun outside work, or I must make a ton of money.
Tis not true and here is proof…
I have a lot of fun and I enjoy traveling, going to concerts, trying new restaurants and exploring new places. (Which all costs money!!)
And I definitely do not make a ton of money. If I made a ton of money, I wouldn’t be investing in real estate (JK I love real estate; I would be buying apartment complexes if I made a ton of money). The key is my spending has not significantly increased since I first started working in 2016.
Pro tip: Every time you get a raise put the extra money away into your savings account instead of increasing your spending. This doesn't mean you can't treat yourself and celebrate though!
My point is there are quite a few tactics that you can deploy to achieve your financial goals, whether it is buying a house, reducing your debt/student loans or saving up for that trip you want to take.
Here are 5 key steps that you can use to save half of your salary every month:
1.Determine how much you spend every month on what
Write down all of the categories that you spend money in every month and calculate how much you spend each month per category. My categories include gas, groceries, car, mortgage, personal care, shopping, dining out and entertainment. You may also have other categories like student loans, rent, travel etc.
This will give you an understanding of how much you are spending in each category every month. WARNING: This might make you sick. When I first completed this exercise, I couldn’t believe how much I was spending on clothes that I didn’t need. My dining out and entertainment category was also off the charts.
Pro tip: There are so many budgeting apps out there that will help you automate this process. I personally prefer figuring this out in excel and using a good ole piece of paper. Every Friday I do a financial health check to pay my bills and keep track of what I'm spending.
2.Spend less than you earn
When you track your spending, you need to compare your spending to how much money you have coming in every month after taxes.
If you subtract your expenses from your income and the number is negative, aka in the red, then you have a major problem. You are spending more money than you earn, and you are putting yourself in a risky situation. To get yourself out of this situation you need to follow the next step religiously.
3.Eliminate unnecessary spending
Take the list you created in the first step and circle the categories where you know you could spend less. My categories I could eliminate and minimize included shopping, personal care and dining out/entertainment.
I was spending about $200 a month on clothes I didn’t need. I love Marshalls, but I had more than enough clothes in my closet. Gradually I eliminated this cost all together. I worked on creating new outfit combinations and now only buy when I need versus when I want.
I also cut down costs on personal care. I stopped buying super expensive skin care products and started buying brands off the pharmacy shelf that surprisingly worked better than the expensive stuff. That resulted in about $100+ in savings every month.
Pro tip: Focus on the big three areas to cut down your monthly spending Car: Buy don’t lease, consider buying used and don’t buy the top of the line. Keep total car payments below 10% of your salary every month and you will be in a good place. Also, shop around for car insurance, this could result in big savings $$$. I saved $100 a month by switching and maintained my level of coverage. Housing: A good rule of thumb is to spend 30% of your salary on your housing. However, I strive to get below that range. You can accomplish this by living with a roommate, living within your means and even buying versus renting may result in lower payments. Food/Dining Out: For groceries you can minimize your bill by buying in bulk or shopping at stores like Aldi. Start planning out your meals every week, try making all your meals at home versus eating out for lunch and dinner. Make a list and only buy what is on that list when you are in the grocery store. When dining out try to stay below a certain price range and opt to not buy drinks or only buy one drink. Alcohol is the most expensive thing on the menu.
4.Build up an emergency savings and maximize your 401K/403B match
Starting to save for retirement now will give you a head start. The reason is compound interest.
As you invest your 401k in the stock market it will grow exponentially over time. The earlier you start the more money you will earn. Taking advantage of your company’s match is key. They are giving you money toward your retirement and not taking advantage of it is like throwing it in the trash.
You also should allocate a portion of your income every month towards an emergency savings account. A good rule of thumb is to save about 6 months’ worth of your salary and housing payments. This will protect you in case there is an economic downturn and you lose your job.
You can also create savings categories and allocate your savings every month to a specific bucket. When I save 50% of my salary every month it gets divvied up into an emergency, travel, real estate investing and house improvement buckets.
Pro tip: create a separate bank account for these funds and automatically deposit money into the account every month. This way you automate your savings and you cannot touch the money until you actually need it.
5.Create a budget and track it religiously
The last step here is the most important. Now that you know where your money is going, you need to set healthy spending limits for each category and track your spending religiously. I’m not saying check on your bank account every day. I’m saying at the end of the month review your spending. If you make and break certain category limits, then alter your habits accordingly the following month. Reviewing your spending will make a large impact and force you to be conscientious about your purchases.
Pro tip: Set up credit card account alerts. I know how much I can put on my credit card every month and I set up alerts so that if my credit card hits $500 I get a ping. I try not to spend above $500 a month on my credit card.
Budgeting is not easy and trust me you will not become a pro at it immediately. Take it slow and gradually improve your spending habits. Eventually you will be able to swizzle some of your spending around as long as you maintain your savings. For instance, if you see you are spending less in dining out and you have a concert coming up that you really want to go to, then swizzle that dining out budget to that concert. Never swizzle your savings.
Stay tuned for more Financial Freedom content! Let me know if you have any specific questions related to saving and putting a strategy in place to achieve your saving goals! Happy Budgeting. Until next time, Amanda
Please note: I am not a financial planner, the advice I give here is based on my own experience and what has worked for me. Please consult a professional financial advisor before taking any action. Thank you.
Hey Amanda, Good advice. I have always brown bagged my lunch and coffee if they charge for it at work. And coffee at Starbucks/Dunkin is very rare. It adds up. In tip 4, if you are budgeting for travel and house upkeep, I normally consider that as part of my monthly budget, amortizing the expected cost over each month for the year. Same with car upkeep, pet care, etc.
I read an article in Kiplinger this month that explained that the 3-6 month liquidity rule may not be enough as many lost jobs longer during the pandemic. And, that rule only applies if you have a working spouse. I started with 3-6 months and built that up over time to 9 - 12 months.
Just food for thought.
I hope you are well and wish you a Merry Christmas and a Happy and Healthy 2021!