Cindy and Karen are young professional roommates living and working in New York City. They each have relatively high paying jobs but rent and other costs associated with living in the big city have cut into their monthly take home income. They’ve always dreamt of going to France to see the Eiffel tower but they don’t have enough money saved up to buy plane tickets there. Together they commit themselves to saving the necessary funds to make their Paris trip become a reality. Although they’re now excited about achieving their savings goals, they are unsure where to begin the process. What should they do?
Personal Finance is a hot topic that has been discussed at length by many bloggers. With all this information available to us, it can be kind of difficult distilling it all into digestible pieces. How do we set up processes to help us save our first $1000 and beyond? I have compiled a list of 5 of my favorite tips to help you begin your savings journey. Lets take a look:
Set up a savings account
This may seem like a no-brainer but many people still neglect this step. If all your money is in your checking account, you will think of it as spending money (I am in the same boat. It’s human nature). You need to secure funds in a savings account to maximize your saving potential. Although brick and mortar banks offer savings accounts with higher interest rates than checking accounts, most still have poor rates.
With the increased use of online banking in the United States over last decade or so, this option has become much more favorable. Some online banks savings accounts return as much as 1% interest on savings! This may not seem like much, but if you let $10,000 sit in that high yield savings account for a year it would generate over $100 in interest. That’s $100 for letting your money sit there! I have provided a list of 3 of my favorite online banking options below:
Interest rate: 1.00%
Minimum Deposit: $0
Ally bank is consistently among the highest rated online banks. They have been in the game for over a decade and offer an easy to use mobile banking app. At a 1.00% rate, their savings account rate is one of the best in the industry and they have customer service representatives available 24/7 to answer any questions you may have. For a full detailed review, check out the link below:
Capital One 360 Savings
Interest rate: 0.75%
Minimum Deposit: $0
I personally use capital one 360 savings as my savings option. The main reason for this is that I use the Capital One “Venture Card” and decided it would be easy to sync the 2 accounts. Although this savings account option offers a lower return than the other two options, it offers a unique feature that will help you track your savings goals. Capital One 360 provides a feature called “My Savings Goals” which helps users set amounts and deadlines for savings goals. It will tell you exactly how much you need to save each month to reach your goals. It’s a pretty cool feature that I use often.
American Express Savings
Interest rate: 0.90%
Minimum Deposit: $0
As one of the most admired companies in America (#8 in 2016), American Express is known for providing quality products to its customers. Although I don’t personally have experience with the company their reviews speak of great customer service and an easy application process. My family has had American Express accounts for many years and they speak very highly of their experience with the company.
Set savings goals
How much should you save per month? Most information out there says this number is anywhere from 3% to more than 20% of your take home income. Although I tend to lean more towards the 20% side, I know this percentage may not be feasible for everyone’s budget. Determining what percentage works for your budget is the 1st step in setting your savings goals. There are some great apps out there that will help you in this assessment. I personally use “Mint” to track my finances. Mint allows you to sync all your accounts (checking, savings, 401k and other investments) to one comprehensive platform. It offers features to track your monthly spending, spending by category and many other awesome financial metrics. You can use these metrics evaluate what percentage of your take home income you can save.
Once you have come up with this percentage, calculate how long it will take you to reach your savings goal. Will it take you 6 months? One year? After you have calculated these 2 metrics WRITE THEM DOWN. People who write down their goals are 50% more likely to achieve them than those who don’t! Hang your goals somewhere where you can see them. I personally use a white board that I hang in my room. By doing this, you are constantly reminding yourself about the savings goals you have set for yourself. The next step in the process will help you increase your monthly savings contribution so that you can reach your goals faster than you ever thought possible.
Trim some fat
In this scenario, Chelsea and Karen have high fixed costs such as rent and utilities that they’ll be unable to trim from their budget. However, if they were to sit down and really think about what they spend money on each month I’m sure they could find something to trim.
Do you have an expensive cable package? A suggestion would be to cancel the cable, buy a roku or google chrome cast and sign up for Netflix ($7 per month). This trim alone may save you $50 a month. Do you eat lunch every day at work? Try bringing your lunch to work every day and you could save over $100 per month. Do you eat out 3 times a week with friends? Cut out down your outings to just 2 times a week and you may be able to save over $100 just there. Get creative with your budget trimming. You may be surprised how much you can save. Once you finish this step, allocate the excess funds to your monthly savings total. This increase will help you reach your savings goals much faster.
Automate your savings
All the online banks I listed earlier will have a feature that will allow you to set up automatic transfers from your checking account. I recommend setting up a monthly transfer of your specified savings amount to get started. Once you have your monthly transfer set up the next step is to…. forget about it! That’s right, you have done all the hard work up until this point and now it’s time to start saving. Imagine the peace of mind you will have knowing that you are automatically setting aside money every month. As the year progresses, periodically assess your goals to verify you are still on track. Once you have your savings account fully automated, it’s time to sprint towards the finish line. Don’t worry you’re almost there!
Find an accountability buddy
This step is crucial for your sustained financial success. Finding a like-minded individual with whom you can share your savings goals will have a massive positive effect on your savings potential. This person can be a friend, family member or some other person that can hold you accountable to reaching your goals. I recommend following up with your buddy at least once a month to communicate your progress towards your goal.
Bringing it all together
Cindy and Karen sat down together one Saturday afternoon and went over their finances. After initial inspection, they concluded that they would be able to save $200 per month to put toward their Paris fund. They determined that in order for them to achieve their savings goals, they would need to save for 8 months.
After analyzing their finances, they found that they had been spending $10 at lunch every work day. They committed to packing their lunch daily and were able to save an extra $120 per month to put towards their savings goal. That Monday, they went online and signed up for a high yield savings account and set up a monthly automatic transfer of $320. Every month, Cindy and Karen would sit down and review if they were still on track to meet their goal. After just FIVE MONTHS of saving they were able to save enough money to buy their plane tickets and book an Air B&B for Paris. How do you say “That’s Awesome” in French?
As with any goal, you need to commit yourself to achieving it. Saving for the future living expenses and fun excursions takes a little effort to set up but the rewards you’ll reap will be well worth it. Saving is not something just your parents do, the sooner you start the better. You have reached the end of the savings set up. Give yourself a pat on the back for a job well done. Now keep up the momentum and SAVE, SAVE, SAVE! Did you find the information in this article useful? Do you have any other tips that you feel would be beneficial for others to hear about? I would love to hear your feedback.
My book recommendation for this article is “MONEY Master the game” by Tony Robbins. This book is packed with great financial information from setting up savings, to 401k’s, to annuities and the list goes on. I have provided the link for this book below: