The effective way on how to save money, is to save that money. Plain and simple. Don’t spend it. Keep it! However it’s easier said than done. Of course, we need to pay our bills. But the question is: what our bills are made of? Do you credit card bills? Do you have loans? Or you have just the usual bill of a person that has no debts at all?
Note that the more you control your bills; the more chance you can save or save even more. It is really essential to track down your bills and cut down what are those not necessary only wants not
Let me break down the five steps on how to save money effectively that I personally used. Begin slideshow.
1. Stop the habit of using credit card.
If you have the ability to pay the total balance of your credit card, pay it off. Do it right now! The more you delayed the payment… the more it will accumulate interest. Paying all your bad debts gives you ability to save more money.
What is bad debts?
Bad debts are those debts wherein the money, value or services you received out of that debt that does not generate any income at all. For example: if your Iphone 6 was purchased using credit card. Why bad debt? Because even if you sell after purchasing, the amount you’ll get is not enough to pay it back because of depreciation.
On the other hand, good debts (e.i. loans) are those that generates income. These are loans that capable of paying back the loan itself. For example you got a loan as additional capital for your business. You don’t need to pay the entire balance of this good debts because monthly you’ll be able generate income from your business to pay the monthly dues.
2. Pay yourself first.
This is crucial here on how to save money effectively. We have bills to pay, but make sure you pay yourself first. You’re the one who did tremendous job to generate income. It’s an act of kindness towards yourself. The ideal amount is 20 percent of your salary. Keep this amount first for yourself. Make a budget based on your salary minus 20 percent.
The common mistakes we usually do after getting our paycheck are paying the following: the tailor, the barber, carpenter, the plumber, water, electricity etc… What about you? The one that do the hard work. When you will pay yourself?
3. Replace the “habit of spending” by the “habit of saving.”
I purchased a book titled Law of Success (this contains affiliate link) by Napoleon Hill. One of the course taught in this book is the habit of saving. According to Hill, “the saving of money is solely a matter of habit”.
“It is obvious to all that the saving of money is one of the essentials of success, but the big question uppermost in the minds of the majority of those who do not save is: ‘How can I do it?'”
I recommend reading this book. For me, it is the greatest success book ever written. The author studied years of those successful men including Andrew Carnegie and Henry Ford.
4. Track down your expenses and make a budget.
First you have to track down your expenses before creating a budget. Let’s say, you received your April salary. In the following month, which is May, try to track down your expenses. In an excel file or on a piece of paper, make sure you write down your expenses. It’s ideal to write it down after you arrived home every after purchases. This is to avoid forgetting to write. Then, when you are writing, it should have date of purchase, description of the item, and the amount of each item purchased. Spend with usual spending habits.
Then, at the end of the month organized your expenditures. Group the items and obtain its total amount spend. See sample illustration below.
Group them into two: Non Discretionary and Discretionary. Non Discretionary are those expenses that you have to buy or pay — no excuses, because you need those to survive. Discretionary are those things and services that you have the option to get or not to get it.
Notice that I already included ‘savings’ as number one and fell under the Non Discretionary group. Meaning, I didn’t give you option here but to allocate at least 20 percent of your salary.
At the end of the month of May, create a budget for the month of June base on the above May expenses. You have now a clear picture which item you can reduce or cut down. Let’s say you reduce your taxi expenses by using buses. Reduce your dine out and instead eat home made food. You can create you own gift ideas to reduce gift expenses.
The above expenses for May should be less compared to your budget allocated for the month of June. And stick to the budget. The bottom line is try to live life below your means and keep those extra money as savings. The secret for living below your means is to Buy what you need, want what you have.
5. Go to your bank/remittance center and deposit your savings.
Now get the 20 percent you paid for yourself mentioned in step number two and got to the bank and deposit it. You will start accumulating now a savings that later on will become your emergency fund. Why emergency fund? What is emergency fund?
On my next post I will write emergency fund. Why it is necessary to build emergency fund before you start investing your savings.