Here at GoDay, we are strong believers of building your savings. Savings are so important. Whether you are saving for an unexpected roadbump in life, a dream vacation, to buy your dream home, or to send your kids (or yourself) off to post-secondary education, savings can help you achieve the things in life you want.
Building your savings doesn’t happen overnight. However, putting off saving because it seems daunting or impossible to see the light at the end of the tunnel, isn’t going to get you ahead. It’s important to remember that saving money takes time, but small steps can add up quickly. Before you know it you can have the money you need to make your dreams and goals come true.
So where do you start?
Ask yourself what you’re saving for
Let’s start with thinking about what you want to save money for. Think long-term and short-term. Although retirement can seem decades away, it’s important to acknowledge that you are going to eventually, one day, need to retire, and you’ll want to have money when you do. We often ignore those far off goals because the shorter-term ones can seem more attainable, and give you more immediate gratification, but you need to think about your future both near and far.
Things you may want to consider saying for are:
- Post-secondary education
- Buying a house
- Buying a new car
- Renovations to your home
- Having children
The options are endless, and everyone’s key priority items will look different based off your own personal priorities.
Save more or pay down debt?
Next you should ask yourself if you should be focusing on saving more money, or paying down your current debt. This can be a common question for people that are sitting on debt. However, the answer to this question really depends on your situation and your debt.
First you want to look at your type of debt, and the interest rates for each. For example, paying back a student loan may have a lower interest rate versus a credit card or pay-day loan. You’ll want to focus on paying off debt with a higher interest rate sooner, and you’ll also want to focus on any debt that has punishments for not being able to make the minimum payments.
This doesn’t mean you should not be saving at all. Taking a look at what the minimum payments are for your debt, and ensuring you make those should be a priority. However, if you do have some leftover money after those payments are made, you should be putting it into a savings account that makes you money while it’s sitting there. Even $20 a week can make a difference, and it’s important to have your spare change making money for you while it’s sitting there.
Accounts like RRSP or TFSA’s can be good options here.
Should I have an emergency fund?
In short, yes. Emergency funds are often not thought about until it’s too late. Which is a big problem! You never know when an emergency will strike. Whether it’s a home repair you didn’t anticipate, a medical emergency, a global pandemic that causes you to lose your income, or whatever the case, you want to be prepared.
I know you always think it’ll never happen to you or your family, but you want to have a cushion and be safe versus sorry. The rule of thumb here is that you should have 3-6 months worth of expenses saved in your emergency fund. When we say “expenses” we mean anything that is a necessity to live such as your rent/mortgage payments, food, hydro, water, internet, etc.
This money for your emergency fund should also sit in an account that you can easily access but not too easily. You don’t want to be dipping into this account for unrelated things, but if an emergency does happen and you need the money, you don’t want to be punished for withdrawing it or have a limit of how much you can withdraw.
Can you afford to save money?
One of the biggest things you hear is the question of if you can afford to save money, and it’s a question you need to ask yourself based on your finances. Keeping in mind that it’s easy to say that you don’t have enough to allocate towards savings, even if you do. So before being too quick to say “no”, go through this process:
Update your budget
How often do you update or manage your budget? Do you even have one? If you do, are you checking your budget regularly or is it something you only monitor when needed? When it comes to your budget, doing regular updates is what can help you see where your money is going and if there are spots in your budget where you can be saving more. It’s important to remember that you can start small with savings, and it can add up quickly. If you can commit to putting aside a small amount of money each paycheck and work your way up, you’ll see your savings grow quicker than you expected.
Treat your savings like a bill
When you start to look at your savings like a necessity, like paying a bill, your mindset will change about it. We often put off savings because we feel like we can, or we forget about it because there isn’t any penalty for not saving like a bill has. However, if we get used to putting money into our savings like we would paying a monthly bill, you’ll quickly develop a habit and mentality that savings is a necessity.
This is the real test as to whether or not you can save more money. Are you financially stressed? Are you looking back at your statements and wondering where your money is going? It’s likely things like eating out too often, buying your morning coffee every day, or that new pair of shoes you didn’t need. It’s not expected that you just stop doing these things completely, but be more mindful of how often you are doing it and how much of your money is being sunk into it.
Can you afford to be saving MORE?
The next question to ask yourself is whether or not you can be saving more than you are? Maybe you are already saving, but you haven’t taken a look at your finances for a few years, and could be building up your savings quicker than you are. Here are some ways to reevaluate your finances and budget to see if you can be saving more:
Step one: Calculate your after-tax income
Your after-tax income is what remains of your paycheck after taxes and deductions. If you get a regular paycheck, or are on salary, this should be easy to determine by looking at your previous pay stubs. If you are self-employed, this may look a bit different. You’ll need to take your gross income, minus your business expenses, and minus anything you put aside for your taxes.
Step two: Limit your needs
Now go back to your budget, if you don’t have one, create one! Take a look at how much you spend on your needs each month. Things to include are:
- Car insurance
- Other insurance like health or home
- Regular medical expenses like prescriptions
Remember, only 50% of your income should fall towards your needs. If you come in over, take a look at what can be adjusted or where you can save costs. Maybe it’s calling your local car insurance company to see if there are better options, or deal shopping when doing groceries. Remember, your needs aren’t your wants. Wants are things you can live without like cable, needs are things that can severely impact your life if you aren’t putting money towards them.
Step three: Limit your wants
This is one of the easiest categories to cut down on because you don’t need any of the things that fall into this category. However, don’t start going wild on manicures and that trip to Thailand, remember how strict we were in the “needs” category. Your “wants” are going to include all those things that didn’t fall under there. For example, your cell phone bill, cable or Netflix subscription, home renovations, etc. Before you know it, more of that 30% of your wants may be taken up by those things you once thought were needs.
Step four: Save more
Now let’s get to the saving. Note that this can also include debt repayments outside of your minimum repayment amount that falls under “needs”. This includes any additional car payments you make, or payments to your credit card that are outside of your minimum repayment amount. This 20% may go into your emergency fund, and/or your retirement accounts as well. To make it easy, you may want to make an auto-withdrawal from your account that your paycheck goes into each month so you don’t ever find excuses not to put money into your savings.
You’re probably wondering why 20%? And the reasoning behind this is that it’s the estimated percentage that the average person will need to save in order to reach financial independence before you’re too old to enjoy it. Provided you want to save 25 times your annual income to live comfortably when you’re retired, it’ll take you approximately 41 years to get to that point when saving 20% of your income each year. Obviously the less, or more, you save, the longer or shorter that amount of years is. So ask yourself: What’s your end goal? How long do you want to work for? If the answer is as short as possible, get saving!
What are small things I can give up to save more?
We often get so caught up in life, that we think we have no extra income to put into our savings. The reality is, if you take a good, hard look at your expenses each month, you’ll likely realize areas where you are overspending or that you can cut back.
If you are looking for additional inspiration on how you can save money. Try taking a look at:
- Cable: Do you need it at all? Do you fully utilize the plan you’re paying for? Are there cheaper options?
- Lunch: Can you meal prep and bring your own lunch to work or school more?
- Shipping: Are you doing a lot of online shopping and paying for shipping when you could just go to the store and save?
- ATM fees: Can you cut back on where you’re using your cards? Can you get better at only taking money out directly from your bank?
- Bank fees: Are there better accounts you could have your money in that have better fees for your money and savings?
- Coffee: Can you cutback on how much you’re buying at cafes and make your own at home?
- Data overage: Are you going over your cell phone data? Are you utilizing all the services on your plan that you are paying for?
- Gym memberships: Are you using it? Are there cheaper membership options?
- Brands names/labels: Are you a brand name junkie? Think about thrift shopping or consignment stores before always buying new.
- Subscriptions: Are you utilizing all your subscriptions? Are you overpaying for features you don’t use?
- Landline phone: Do you need it if you have a cell phone?
What are some of your biggest tips for saving more and building your savings?