As mentioned in our Principles section, our Golden rule of personal finance is to live beneath your means. In other words, if on average you are spending less than you are earning, you are making progress!
If you were to follow just one tenet of personal finance, this would be the one. We are talking on average over a long period of time. It’s completely understandable that some months will go better than others.
If you can do this, you will accumulate and build wealth and security in your financial life. If you don’t, you will likely have a stressful and difficult financial life.
Often money problems spill into other areas of our lives and impact our personal relationships and our overall happiness. So why not make the commitment now to move up the monthly savings depth chart!
First – know your savings rate
Before you can take action you need to know where you are at. To do this you need to calculate your average savings rate. Ideally you are doing this each month. It only takes a few minutes to calculate.
Your savings rate % for any period = Contributions to Savings / Gross income
For example, if Joe has gross income of $50,000 per year and he contributes $10,000 to his 401K and another $2,000 to his savings account then his savings rate is 24% ($12,000 / $50,000).
Actions to Improve
Once you know where you are at, you can take some action to get to the next level. The goal should be to continuously improve by taking consistent action while enjoying the journey along the way!
One way to improve your savings is to increase your income. This includes getting a higher paying job, a promotion, a second job, or some smaller side hustles. There are lots of possibilities and no right answer!
Another way to improve your savings is to decrease your expenses. We talk a lot about ways to do that on this website. There are so many opportunities on the expense side that we could spend hours discussing it.
Two of the biggest areas with significant opportunities are housing and transportation. Most people spend about 50% of their expenses on these two things (33% housing and 17% transportation). If you can find ways to reduce costs in these are you will free up lots of dollars for savings!
Two common techniques used by many to cut these costs dramatically are to buy a duplex (or larger property) and rent out the other unit(s) which allows you to reduce or even eliminate your housing costs. Others buy used cars and drive them a long time to greatly reduce their annual vehicle costs!
Make a game out of it
It’s often been said in business that what gets measured gets done. In other words, if you track something you stay focused on it and likewise make improvements. It’s very unlikely you’ll improve anything if you don’t focus on it!
So make it a point now to keep track of your monthly saving rate as soon as the month is over. You can calculate it in just a few minutes by getting your gross income from you paycheck stubs as well as the contributions to your retirement, investment and savings accounts.
Put your savings rate percentage on some graph paper and put it somewhere you can see it on a regular basis. Challenge yourself to keep improving it. Make it fun by making a game out of it! It’s satisfying when you set a new personal savings record!
If you are in too deep
If you are in deep waters with borrowing or debt that is overwhelming, you may need to get some help. You could be drowning with credit card debt, student loan debt, etc.
There are people out there ready to help!
For example, consider visiting the debt services section of NFCC.ORG which is the National Foundation for Credit Counseling. Their mission is to help you review your specific individual situation and help guide you financially to the best possible outcome.
- Follow the golden rule and live beneath your means to start building wealth
- Understand where you are at by calculating your savings rate each month
- If you want to improve your savings rate you can increase your income, lower your expenses, or do a combination of both
- Make a game out of it by charting your savings rate percentage each month!
- If you are deep underwater in debt payments reach out to others to get help on a plan
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