How to start and sustain a consistent savings habit

Intro

Earlier, I wrote on retirement planning and one of the ways to start off on that journey is through savings.

Meaning of Savings

According to Investopedia, “Savings is the amount of money left over after spending and other obligations are deducted from earnings. Savings are kept in the form of cash or cash equivalents (e.g. as bank deposits), which is exposed to no risk of loss, but also comes with correspondingly minimal returns.”

It is the safe accumulation of funds for a future use. Savings don’t fluctuate and are generally free of financial risk. The emphasis is on safety and liquidity. – Paul Mladjenovic

Culled from Stock Investing for Dummies 2^nd edition (page 32)

Britannica adds that “the extent to which individuals save is affected by their preferences for future over present consumption, their expectations of future income, and to some extent by the rate of interest.”

The ultimate goal of savings is capital preservation, that is, to protect your money. Savings differ from investment where the ultimate goal is to grow your money i.e. capital appreciation. To reach this goal, you have to expose yourself to some risk. I cover the topic of investing in my post, Investing – The Next Phase to Wealth Building.

What Are the Types of Savings?

On the types of savings, Investopedia states that

“Savings is essentially cash, so there is only one type of savings in that respect. However, you can choose to keep your cash savings in various places, such as under the mattress or in a bank account.”

Methods of Savings

• Automated Savings

One of the reasons we do not save is because of inertia, not our incomes. The way out of this could be to set your savings plan on autopilot.

Many financial institutions allow you to set up an automated savings plan. In this plan, a fraction of your salary is automatically debited and sent to a savings vehicle. There are also several savings apps with automated debit features that ensure that you are not tempted to spend the money you reserved for savings. One of such apps is PiggyVest. Read more about the app in the post, 7 Excellent Reasons to Use the PiggyVest app.

Saving a fixed amount of money each month through an automated savings plan is one of the best ways to build up savings. – Paul J. Lim

Culled from Investing Demystified (page 25)

• Depositing spare cash in a piggy bank

An easy and fun way to save.

• Cash deposits in Bank

You can place your savings in your savings account at your bank. Do note that savings accounts are very safe but tend to offer very low rates of return as a result.

• Rotational Savings

Generally known in Nigeria as Ajo, Esusu or Adashe. It is an informal method of pulling together and saving money.

Here’s how it works, a group of individuals come together and each put an agreed sum of money into savings each month. At the close of every month, somebody in the group takes all the money saved for that month. This is successively rotated among all group members for the duration of the monthly contribution.

At the end of the rotation, the contribution is either cancelled or starts all over again. It is desirable to do this scheme with trustworthy people else you stand the risk of losing your savings.

7 Reasons to take Savings Seriously

1. Investment. You need to save money to invest it. “You can’t invest money until you have saved enough money to invest.” – Paul J. Lim
2. Rainy day funds. Financial emergencies such as a home appliance breaking down, losing your job, do not give you advance notice. Hence the need to prepare to face it head-on. It is desirable to have between three and six months’ worth of living expenses set aside.
3. Improved future plans. Having savings enables you to make more prudent (financial) plans for your future.
4. Achievable aspirations. Future purchases or goals such as buying a house, saving for retirement, are attainable with a savings culture.
5. Reduced/Zero borrowing. You can pay for purchases without having to borrow money.
6. Boosts self-confidence. Having money saved in the bank gives a sense of achievement and assurance.
7. Reduced splurges. You are able to set better priorities and be more judicious in spending.

8 Saving Hacks

1. Write down your expenses. The first step to achieving this would be to keep track of all your expenditure. There are apps that help you track your spending.
2. Determine your savings rate. The savings rate is the percentage of disposable personal income retained rather than spent. Aim for about 10% to 20% of your income.
3. Deduct your savings first. It is wise to first set aside your savings from your earnings and place them in a safe place where you cannot access them easily. Else you may want to spend it all.
4. Have a realistic savings goal. This keeps you grounded and helps you withstand the temptation to go on a splurge. Write out the purpose of the funds, the amount of money you need to achieve your goal, and how much you need to save over a given period to reach the goal. Revisit the goal to ensure that you are on track.
5. Select an easy saving method. This should be an uncomplicated and safe method of saving to ensure consistency.
6. Cut down on costs/spending. This is the best way to increase savings. Identify indulgences that you can spend less on. Similarly, search for ways to save on your fixed monthly overheads.
7. Have a budget. Your budget should outline how your expenses measure up to your income so you can plan your spending and limit overspending.
8. Review progress. Go through your budget and check your progress monthly. This helps you stick to your savings strategy, and it also assists you to detect and expeditiously resolve issues. Learning how to save money may even galvanize you to find further ways to save and reach your goals quicker.

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You don’t have to live paycheck to paycheck: start your savings journey today.

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Disclaimer

The material provided on this page is for informational use only and is not intended for financial, tax or investment advice. Blogging with Eli assumes no liability for any loss or damage resulting from one’s reliance on the material provided. Kindly consult your financial professional and tax advisor when making decisions about your financial situation.