Plan How You Spend
Do you plan how you will spend your income?
Do you treat your savings as an expense?
Do you pay yourself first or do you pay credit card companies, electric companies, water companies, and cellular phone service providers first?
Do you stick to your budget?
Investopedia defines Budget as:
An estimation of the revenue and expenses over a specified future period of time.
However, when most people come across the term budget, they find it a bit limiting or restricting.
I personally have negative memories when I hear that word. I remember the times when I was young when we didn’t have the “budget” for toys and computer games that I would like to have. (This proved to be a good first-hand experience for me on money management.)
That’s why some suggest calling it a Spending Plan.
Sounds better right? Say “Yes!”.
The Expense of Tomorrow
Have you noticed that your lifestyle changes when you get more income?
You tend to buy more unnecessary things or you dine in more expensive restaurants.
If you don’t agree, then good for you!
That means that your lifestyle does not change even if you get an increase in income.
But that’s not the case for most people.
Those who are working and middle-class usually fall for this trap.
But, the good news is there’s a way out of this financial mess.
What you have to do is treat savings as an expense.
The savings that you will accumulate today will fuel your future financial goals.
And actually, with savings, you will less likely to feel remorse after you save.
Am I right that you don’t feel sorry or depressed when you set aside money as savings? Say “Yes!”.
How to Save Systematically
Now you might ask, “OK, I will treat savings as an expense. But how will I do that if there’s no more left to save after I pay all of my bills?“.
That means that you are using the wrong formula in getting the amount that you will set aside as savings.
What formula? This formula:
Income – Expenses = Savings
Can you see what’s wrong with this formula for savings?
Your income will NEVER have any portion left for savings if you don’t pay yourself first.
So, my advice is to never ever pay other people or other companies first.
Instead, pay yourself first by using this winning formula:
Income – Savings = Expenses
See the difference?
This way, you pay yourself first and make do with what’s left for your expenses.
Trust me, this works and you will still survive! 🙂
To get you started, here are some tips you would also want to consider when saving:
- Open a savings account in a bank that you don’t have immediate access to. Consider opening a passbook account with no ATM card. With this, you will have a hard time withdrawing and spending the savings you have accumulated.
- On the account you created in #1, systematically set aside a fixed percentage of your income and put it into that account. Start with 10% of your GROSS monthly income and as you get used to it, work your way up to 20% or even more. Ultimately, your savings will increase along with our income. If you think you can’t start with 10%, start with 1%. Remember this: the amount does not matter, it’s the habit that counts. Even if you set aside a small percentage at first, it’s the consistency of the habit that would matter in the long run.
- Give yourself a reward when you achieve a financial goal. Of course, if you blow your savings for that reward, you would totally be missing the point. Start with something small or some item that you have been wanting to have for a long time. But, be reasonable.
- Never buy on impulse. Give yourself time to reflect on things you would want to buy. Let it sink in for a few weeks or a month, especially for big-ticket items like gadgets, jewelry, and appliances. In case you’re not aware, we buy based on emotions and justify what we bought with logic.
- Ask yourself if what you are going to spend on is a “need” or a “want”. This analysis alone can help you save thousands (even tens of thousands!).
There you go, I hope I gave you some useful tips and tricks to help you set more money aside.
If you get to practice this and be comfortable with our winning formula, we can further upgrade it to this:
Income – Investments = Expenses
But first, get the habit of paying yourself first and setting aside the fixed percentage of your gross monthly income.
When you’re good at it, then we’ll talk about where we will invest.
Alright? Say “Yes!”
To our success in all areas of life,
Argel Tiburcio, PFA
Image source: http://www.flickr.com/photos/68751915@N05/6793826885
Awesome post Argel! Very well said! 🙂