The Importance of Savings
Although many people dream about winning the lottery, it’s highly unlikely you ever will. But here is a tried-and-true way to reach your goals. It takes discipline and time, but unlike the lottery, it is practically guaranteed to help make your dreams come true. It’s a steady plan of saving and investing. Saving means setting aside money on a regular basis, preferably from every paycheck. But to save, you must spend less than you earn. Reducing your spending, as opposed to earning more money, is the real key to gaining control of your finances. Unfortunately, many people spend everything they earn, or even live beyond their means.
Why You Should Save
By saving now, you will build a reserve for the future. Eventually, you may use this reserve too:
• Pay for large future expenses, such as a down payment on a home or your retirements
• Prepare for emergencies – medical or other
• Improve your financial standing, such as paying off outstanding bills and improving your credit rating
• Invest in yourself, through education, job training or tools for your trade or business.
Plan Your Future: Identify Your Goals and Make A Budget
What are your goals for five years, 10 years, 20 years from now: To buy your own home? Send a child to college? It’s important to define your goals, and when you want to reach them.
Develop a Game Plan
In order to reach your goals, you need a plan. This plan is called a budget. Don’t be put off by the name. A budget is just a tool to help you get the most from your money. It can be as simple or detailed as you like. Most people do not factor in their major financial goals when developing their budget. Instead they begin by writing down their monthly income, subtracting their monthly spending and then deciding how to save or spend what left’s over. It might actually be smarter to first determine your goals and what it would take to meet them, and then integrate those goals into your budget. Here’s how to get started.
Determine Your Goals
Write down your top three major financial goals. These may include paying down debt or saving for a house or your children’s college.
Next, write down the expected total cost and time frame. Divide the cost by the total number of months. This is how much you’ll need to set aside each month to reach your goals. (If the set –asides seem too big, you may want to extend your time frame.)
To reach your goals, you’ll need to set aside a certain amount each month. One good month for doing this is to set aside your goal money first, then cut back spending accordingly.
How much spending will you need to cut? Where will you cut? Or how much additional income, if any, will you need to earn each month? The best way to answer these questions is to do a budget.
Look at The Numbers
Now that you have determined your goals and the money you’ll need to set aside each month to meet them, as well as your monthly take-home income, you can calculate the absolute maximum that you can afford to spend.
Plan Your Monthly Spending
This is where the magic happens. Once you begin to see your financial picture more clearly, you’ll begin to discover new and exciting solutions.
Stay on Track ( By Following Your Budget)
Once you’ve made a budget, write down your spending each month to see if you’re on track. If you accidentally go over budget in one area, don’t panic. Instead, try to cut back in other areas so you can still come out on target. Staying on top of your budget takes only a few hours a month. I may seem awkward at first, but the more you can do it the easier it get. Rewards soon follow. As your debts go down, your savings will increase. Best of all, you’ll live better by getting the most from your money.
Estimate Your Future Spending
Once you know how much you spend, you can use this information to estimate your monthly expenses. First, put in your fixed bills, such as your monthly mortgage payment or rent, car payment and all loan and credit card payments. Then fill in the rest, estimating as best as you can. Make sure you include all the hidden costs of driving a car (insurance, gasoline, repairs) and owning a home (maintenance, repairs). Even if you don’t have to make an insurance payment next month, include one-twelfth of your yearly insurance bills. When planning your budget, be realistic about spending items. The more accurate you are, the better you’ll see the current state of your finances and the better you’ll be able to make decisions.
Total Your Spending and Compare
If your total monthly spending is more than your maximum spending limit, go back and look for areas to trim. Keep cutting until your monthly spending fall below the maximum, so there is money left over.
Set An Emergency Fund
What you do with the small amount you have left over at the end of each month will have an enormous impact on your finances. This is the only money, other than the amount you’ve set aside for your goal, that you can use to improve your financial situation. Consider using this money to improve your financial situation by paying down your credit card and loan balances, or setting it aside for an emergency fund.
Some of the money in your budget won’t actually be spent every month. This includes money you’ve budgeted for future car repairs, house repairs, insurance, property taxes and medical and dental bills. Don’t spend it. When those big bills finally arrive, you won’t be caught short.
This article was submitted by the Royal Bank of Canada as part of the activities commemorating Financial Literacy Month, October 2007, an initiative coordinated by the ECCB. Financial Literacy Month October 2007 – Save For Your Future.
