A 2016 survey by Westpac revealed that 85 per cent of Australians who resolve to save money have an average target of $11,234 in savings for the year. However, 61 per cent of those who intend to start saving money end up breaking their financial resolutions for various reasons – including lack of willpower.
Developing a healthy saving plan can help individuals achieve financial independence and retire early, but not everyone has the skill and resolve to make it happen. Fortunately, it’s never too early or too late to learn how to save.
Individuals can resolve to save a percentage of their income for retirement or other personal goals by laying the foundations for a good saving habit. For a more accurate computation of how much an individual needs to set aside from their paycheck, they must consider three things: goal, time frame and willpower.
Determine goalsIt’s difficult for some people to hold on to their money, especially since e-commerce has made spending easier, but starting with a specific goal in mind should help an individual come up with a ballpark figure of how much they really need to save.
Goals should preferably be specific, but they don’t have to be irrevocable since circumstances change over time. The objective may also be for the short, medium or long term, but it should be achievable enough that giving up wouldn’t even count as an option.
The most crucial part is that goals should be important enough to serve as a motivation for saving money.
Consider the time frameTime frame is another important factor to consider when deciding how much to save monthly or every paycheck.
The probability of achieving a goal can be affected by the length of time a person needs to make it happen. As previously mentioned, objectives can be for the short, medium or long term, so this should already serve as an approximate time frame when saving.
Knowing how long a person has to save up the required sum of money would already give them an idea of how much they need to set aside on a regular basis. A person needs to strike a balance between their objectives and required time frame to ensure that they can regularly meet their saving goals, otherwise, they could lose their motivation.
This means a $1 million goal to save money for retirement in 25 years is more achievable compared to saving $250,000 in a year – unless a person owns a growing business during an economic boom or has multiple sources of high income. However, if employment is their sole source of income and they are low to mid-income earners, it may require extreme measures just to reach the first $100,000.
Exercise willpower by following a saving strategy or twoA balanced saving goal and time frame may be crucial to saving money, but a person still won’t succeed if they don’t exercise discipline. This is why it’s important to find and practise a strategy they can uphold.
Below are some simple but effective methods for saving money:
- Create budget and spending plans
- Set up automatic transfers
- Try the 50/30/20 rule
Create budget and spending plans
It’s necessary to review monthly expenses to understand household spending and devise a monthly financial plan.
By creating a budget and saving plan that is appropriate to their actual circumstance, an individual – and their household – could figure out their financial situation. Once they have a clear idea of their income and expenses, they would be able to compute how much they need to set aside from their paycheck after taxes and expenses are removed.
Set up automatic transfers
They can also open a separate savings account for their goal and save money without touching their income by setting up an auto transfer from their salary account.
Try the 50/30/20 rule
The 50/30/20 rule may prove useful for mid to long-term saving goals. This strategy requires the individual to split their after tax income and allocate 50 per cent to essential living expenses, 30 per cent to basic luxuries such as cable subscriptions and 20 per cent to savings and/or debt repayments.
Twenty per cent may seem high, but it’s actually an ideal amount because it can quickly boost savings – if the individual manages to avoid unnecessary debt.
It’s important for individuals to develop good saving habits so that they can set aside money once they have a steady income. The amount they are able to save would lay the foundations for a sizeable nest egg if a sound investment strategy is utilised.
Explore Nest Egg’s Save category for more ideas on how to save money.