How much should I be saving? And how do I build up my savings? These are important questions no matter what your income is - and they are addressed in this ING Be Good at Money video tutorial.
How to take control of your finances
1. First, make a list of fixed expenses. Include monthly bills and annual expenses (such as property taxes and school fees). Check through a year of bank statements to see if there are any costs that have been overlooked. Add them and divide by 12 to get a figure for fixed monthly expenses.
2. Next, make a list of your variable expenses. There are two types of variable expenses - "essential" and "non-essential" - so add both headings to your list. Essential variable expenses are things like food, clothing or the cost of transportation to get to work. A non-essential variable expense is something you can do without (do you really need three magazine subscriptions?). Both types of variable expenses are costs over which you have a lot of control.
3. It is a good idea to track variable expenses. A traditional method is to fill an envelope with receipts for everything bought with cash and card and analyse it in combination with variable expenses listed on bank statements. Online calculators can also help. After a month, a good overview of spending habits should emerge. But be prepared for some big surprises!
Decision time. Now spending patterns are laid out in black and white, it's time to make some choices. Decide which expenses are necessary and which can be cut. Look for savings on both variable expenses (can you lower your electricity bill by switching supplier?) and fixed expenses (do you really need two cars?). The more you want to save, the more severe you need to be in cutting expenses.
4. The amount you have to save each month can now be worked out by subtracting monthly fixed and variable expenses from monthly income (after tax). Consider eliminating "bad" debt (such as credit card debt) and if you don't already have an emergency fund, start building one. A good rule of thumb is to have an emergency fund of six months of net income. While saving for the worst is not as exciting as saving for a new motorcycle or a holiday abroad, you'll be glad it's there if hardship or bad luck ever strikes.
Whatever is left after you deduct an amount for your emergency fund can be saved for other goals.
The good news is saving doesn't have to be something to think about at the end of the month, just before the money runs out. By incorporating savings into your overall budgeting process, you'll create a habit that can mean saving happens naturally.
Even saving a little can mean a lot
Even if there isn't much left after costs have been taken away from income, a little can go a long way.
Even adding a modest amount to an emergency fund on a regular basis is worth it. Make it even easier by getting your bank to deduct the amount automatically.
The important thing is to get started and get into the habit of saving. Feel more in control of your life and finances and develop a solid savings foundation on which to build in the future.