How to save money
How to save money. It sounds so simple, but for many people, it is anything but simple. Money is a psychological thing and debt, capitalism, and modern-day advertising don’t make it any easier. The important thing is to make a plan and stick to it.
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Step 1: Track your Finances
Before we can start talking about saving you have to know what is coming in and going out each month. I know, this can seem like an enormous task, but you’re just going to have to bite through it. Getting control of your finances all starts with this step. If you don’t know what’s coming in and going out, you won’t have full control over your finances and it will be very difficult to get yourself in a comfortable financial situation.
There are many ways of keeping track of your finances. If you do a quick google search you’ll find hundreds of websites and excel sheets. You can go old-school and write it all down in a notebook or download an app on your phone. For you tech-savvy people, there are even programs that automatically track your bank stuff and add it to those apps or excel sheets. I like to use an app and put in all my transactions manually. It makes me pause and reflect on what I spend.
Really do try to track everything, even those $2,99 coffees on your way to work. It might not seem much, but if you have a $2,99 coffee every workday, that adds up to almost $60 a month or a whopping $777 a year. That’s a lot of money for crappy on-my-way-to-work coffee. And I’m talking relatively cheap coffee here. You do the math on that expensive Starbucks coffee. It will blow your mind. And burn a hole in your wallet.
The message I’m trying to send here is that the little things add up. Most people have a pretty good idea about their rent or mortgage or how much they’re paying for bills and gas, but the little things can creep up on you. Tracking your finances will help you get a clearer view of where your hard-earned money is going to and then you can decide if that $2,99 coffee is really worth it.
Step 2: Get Rid of Bad Debt
Now that you know what is coming in and what is coming out, it is time to take action. For many people step 2 is the hardest one. Depending on where you live, a simple higher education degree could put you back thousands of dollars/pounds/euros in debt. Maybe you just got unlucky and inherited an old family debt. Or maybe you just didn’t know how credit cards worked and now it’s too late.
It’s important to know not all debt is bad. It all depends on the interest you’re paying on that debt. Right now, banks are giving out loans with all-time low-interest rates. This is good debt. In theory, student loans are also good debt because you are investing in yourself through education. However, student loans with high-interest rates should still be considered bad debts because they are costing you a lot of money. Other types of bad debts are credit cards debts, payday loans, and car loans.
There are different strategies when it comes to paying off your debt. Mathematically you should always start with the highest interest rate because that debt is costing you the most money. However, some people can get demotivated by big numbers. If you are such a person, it might be better to start with the debt that is the smallest because you will be done faster. Paying off debt is truly satisfying and will motivate you to keep going and maybe even step it up.
Step 3: Change your mindset
FIRE is based on two concepts: limit your spending and/or up your income. Not everybody has control over their income, but we can all control our spending. Calculate the amount of money you’re saving each month as a percentage. This is your savings rate. Are you above 50%? Great job! This means you save more than you spend each month.
Don’t get discouraged if you are nowhere near this number in the beginning, especially if you have a low or medium income. Most of us have been raised to believe that we need to spend all our money and that savings are worthless. A lot of people, wealthy people too, actually live paycheck-to-paycheck with no savings at all. Because that’s what we’ve been taught, so it must be the correct thing to do, right?
No. You can, if you want to, but since you are still reading this post I’m guessing you don’t really want to. If you want to become financially independent, then you are going to have to make some sacrifices in the short run in order to reach the benefits in the long term. This doesn’t mean you have to say no to everything, but having a frugal lifestyle is often a key success factor in achieving FIRE.
Saving money is not about denying yourself everything. Decide what is truly important for you and what gives you the most joy. Splurge on that every once in a while, but limit your spending on the less important things. This way you won’t feel like you’re living frugal because you can still do the most important things.
Some practical tips to making saving easier:
One of the easiest things to do is set up an automatic transfer of funds to your savings account or investing platform once your salary comes in. This way your monthly saving goal is already achieved without you having to think about it. Whatever money is left, you can now spend without a guilty conscience.
You tracked all your expenses, so you know where the money is going. Do you have any automatic subscriptions and memberships that you don’t really use? Cancel them. There, you just upped your monthly savings goal.
Are you on a roll and do you want to take it to the next level? Try a spending freeze. Set a number of days that you don’t spend anything. Nothing. Not one cent. Not even for food, so make sure you stock up before that. Another way to try a spending freeze is to only buy essentials such as food from the grocery store or gas for your car. When doing this, you should challenge yourself to keep the spending freeze going as long as possible.