So you paid all of your bills for the month and set aside the money you need for the rest of your budget, and low and behold you have some available money left over!
Great! The question is what do you do with it?
When it comes to saving, you can’t be as general as putting it away in a savings account for a rainy day or letting it linger in your checking account.
If you don’t tell your money where to go, it will find a way to spend itself.
They make you choose a major when you go to college because just like you, your money needs a direction and a focus. Money is more psychological than most people realize. When you see anywhere from 40-80 transactions happen within your account within a given month, you’re subconsciously conditioned to believe that the purpose of money is to leave your account.
Just like all of your other expenses that come out of your account have a specific purpose, so should your savings. But before we get into looking at those options, let’s talk about the first two account types you should have to manage your spending.
You should look at all of your planned variable spending for the month like eating out, groceries, gas for your car, entertainment etc. Then, only put that dollar amount in your account each month. If you get paid bi-weekly, you can deposit half each time. This is basically a modern-day envelope system.
You should also have an account for all your fixed bills like rent/mortgage, car payment, insurance, utilities, credit card payments, student loans etc. That way, you’re certain you have the money set aside for your mandatory expenses each month.
Now, let’s look at three ways that will help give your savings a rhyme and reason.
This is the “life happens,” “what if,” “buffer” and non-revolving expense account.
Each month you will allocate a portion of your surplus cash flow toward this account. This is for things like vehicle maintenance, vehicle taxes, medical bills, home repairs, insurance deductibles, veterinarian visits, etc.
People often say the reason why they have trouble budgeting is that something always comes up. Well, you can budget for that, too.
This account may also simply serve as a buffer if things within your regular budget don’t go as planned (bought one too many drinks at the bar).
You don’t always know how much these expenses will cost, nor when they will occur, but allotting money toward an account that can be used to offset those costs as they arise will certainly put you in the driver’s seat and give you more control over how things play out.
“Just like you, your money
needs a direction and a focus.”
I have heard the term emergency fund used in many different ways. A lot of people think of it as a “rainy day” fund you can use to help with all of the stuff I just mentioned. Some people even think if necessary, your 401(k) is an emergency fund (bad idea).
An emergency fund is and always should be three- to six-months worth (or more) of your living expenses, only to be used if you get laid off, fired from your job or need to quit for other reasons and no longer have your primary source of income.
Naturally, if you get laid off, certain luxuries like ongoing entertainment or dining out could be reduced. However, your fixed expenses and some of your variable expenses will still need to be covered.
A portion of your surplus should be allocated toward building up your emergency fund.
You can make a judgment call on what expenses you feel you would completely eliminate if laid off and build your emergency fund number around that (i.e. a gym membership or subscriptions).
However, there are some things you either wouldn’t (hopefully) just go out and buy on a whim or the amount needed for that expense is far greater than you could save in a month’s time.
For those expenses, you will want to have a major expense account. This is the account where you will save for things such as vacations, furniture, appliances, electronics or maybe even a down payment on a home.
These are expenses you have identified that will happen in the future, and you are allotting money every month to be able to use when these expenses arise.
If you separate your money this way, you are giving every dollar a purpose and there’s no longer just a general surplus of cash sitting in your checking or savings account with nowhere to go.
If you really want to make this work, try setting up automatic transfers to these accounts or even setting direct deposits up through your employer so you don’t have to worry about forgetting to do it.
Lastly, you should always consider a portion of your monthly surplus for investing, so that you can have your money work for you. In order to determine how you should invest your money; you would want to know what your intended goal for the invested dollars is. Is it for retirement? A major purchase? Starting a business? How long do you intend to invest the money before you need/want to access it? Asking questions like these will help guide you into determining what account type(s) or investments would be right for you. You should also consider consulting with an advisor before investing.
I hope these tips give you some guidance on becoming a better saver!