Last week, we talked about doing a debt checkup to help you create a realistic household budget. If you followed the steps outlined in the post, you should have a good idea of what your current debt load looks like and how much you can realistically contribute to your debt payoff plan each month. Today’s post focuses on your savings contributions.
How much should you be saving every month? How much are you actually saving each month? Getting into the habit of saving a percentage of your gross income every month can be tricky but there are several things you can do to make the process a little easier.
How much should I be saving?
Whether you’re contributing to an emergency savings account or saving up for an exotic vacation, you’ll need to determine what your baseline savings contribution is every month. How much can you realistically set aside for savings after major expenses have been taken care of? For most people, a safe number to start with is 10 percent of your gross monthly income.
If you get your paycheck via direct deposit, talk to your bank about setting up an automatic transfer to your savings account each month or create an automatic transfer via online banking. You can then break down that 10 percent to save for different purposes — an emergency fund, gifts, a new car, or a downpayment on a house — by setting up a sub-savings account. Organizing your savings contributions like this will make it easier to watch your savings grow from month to month.
Three reasons to pencil in a savings ‘expense’
Automating your savings is one of the simplest ways to build up a savings account quickly. Automation simply means that you set a specific amount of money aside every month for your savings account — you don’t think about it, you just pay yourself the same amount month after month. Plotting this contribution into your budget as an expense can make things a little easier. Just add ‘Savings’ or ‘Emergency Funds’ to your budget as a line item and look at it is another fixed expense. Here are three reasons why setting up your savings as an expense works so well:
- You can set it and forget it. Instead of trying to calculate how much to save — or deciding whether you should save anything at all — in a given month, treating savings as a regular expense lets consistent with your efforts without having to overthink the process.
- You’ll develop a healthy money habit. If saving money doesn’t come naturally to you, automating your savings can help you develop a healthy money habit for the long haul.
- You’ll be less likely to talk yourself out of it. How many times have you decided to ‘save more this month’ but somehow found a reason to spend away potential savings? When you automate your savings and make a commitment to just keep making those monthly ‘payments,’ you may be less likely to talk yourself out of it.
We’ll discuss specific ways to save more money in future posts. Stay tuned for our next post for tips on cleaning up your spending habits.