In the previous post of How To Become Financially Independent, I covered spending less money.
It goes that if we are spending less, than we should have more money in our wallets. If we’ve worked diligently to spend less by way of lifestyle changes then we can begin to pay off our short term debt, we can build our 6 month emergency fund, and we can invest for our future financial goals, whatever they might be.
To be able to get an even better handle on how we can save more we really need to:
1. Track income and expenses
I can’t stress how important this is! I am surprised how many people don’t track their money. They have no clue how much is coming in as income, how much is going out, and where it goes to.
We’re better than this. If we don’t have any way to tell what we spend on utilities, how much our car costs us, or how much we spend on hotels and eating out per year then we have no idea where we can make improvements.
I’d recommend doing whatever works for you: if it’s tracking income and expenses in a notebook with a pencil so be it. I take it a step further and use a spreadsheet. Others may want to use an online service like Mint.com or a smartphone app like Expensify. Whatever you choose, just be sure to tally up income and expenses on a monthly and yearly basis. You’ll thank yourself that you did.
2. Pay yourself first
If we know how much income and expenses we have, then we also know what the delta between the two is. If we’re spending $30,000 a year and we’re bringing home $42,000 a year, then we should be able to save $12,000 a year.
Using that scenario, I’d suggest automatically sending $1,000 on the first of every month to another “no touch” account. For some, it may mean sending it to an online savings account like ING Direct. The point is that you shouldn’t need the extra $12,000 a year so you need to get it out of temptations reach.
This is how I saved a down payment for a house. We can also use the automatic withdrawals to build up our emergency fund or send it to our brokerage account to be used for investing.
3. Make more
One of the easiest ways to save more is to make more! Let’s say we make $50,000 year and we spend $35,000 a year. After taxes, that doesn’t leave a lot of room to save. But what if we got a job that pays us $10,000 even $20,000 more and we keep your spending flat?
We are automatically saving more, it’s that simple! The trick is not trending our spending up as we make more money in our careers. This is a mistake many people make: the more they make the fancier cars they drive, the bigger and more expensive houses they buy, the more they eat out, and the more everyday dollars leave their wallets.
I made that mistake in my younger years and it’s a challenging and slow turnaround to change it.
I believe a good target to shoot for is saving 50% of take home pay. This may sound impossible but I know some of us are doing this. It took me a few years to get there but patience, a continuous re-adjustment of lifestyle, and discipline got me there.
Just back in 2009 I was saving 11%. Then 2010 came and I re-read the classic book Your Money or Your Life, made some small adjustments, and was able to save 16%. 2011 came and the first full year of dedicating myself to financial independence wrought savings of 29%. In 2012 savings jumped to 47% and the goal from here on out is to break 50%.
I honestly think there won’t be much more I can do to save more than 50%, but it goes to show you that it is possible.