Why save money?
Before we talk about how to save, let’s think about.
- Do you save money on a regular basis?
- What is your process for putting savings away?
- Why is it important to save?
In order to save money, you need to use your SMART goal setting skills.
How to Save Money
Define a couple of concrete goals for the medium term (this year) or longer term (beyond a year) that you need/want to save up for.
Research different options. Shop around, do your research, and talk to other people who have made a similar purchase. Are there any other hidden costs involved?
Decide when to achieve your goal. What is your time frame? Is it realistic?
Figure out how much you’ll need to save each month to reach your goal by your timeline.
“Reality Check.” Can you afford to save this amount? If not, make adjustments. You may need to increase your savings time frame or find ways to decrease your monthly expenses or increase your income. You might also have to decide which goal is most important to you and plan to save for that first.
Set up a system. Pay yourself first with automatic transfers to a savings account, put all your change in a jar, or round up your debit card purchase and have a bank deposit this into a savings account. Find a system that works for you.
Write it down and make a personal commitment toward saving for your goal.
Problem Solving. Think about what might get in the way of saving for your goal and how you’ll solve it.
In Finances 101: Your Relationship with Money, we used the lottery example and mentioned that often spending (even imaginary spending) gets divided into wants vs. needs, but what does this mean?
A NEED is something that is essential for survival.
A WANT is something that makes life more convenient, enjoyable, or fulfilling.
Think about the things you’ve spent money on in the last two weeks (e.g., coffee, parking, clothes, meals out, public transit). Go toand jot down the items, and then identify whether each item is a need or a want. Can you see places you might be able to cut down on spending or spend it on a different priority?
Interest as a Way to Save
When we put our money in a savings account, we’re lending our money to the bank. The bank pays us interest for the use of our money. Interest is a percentage of that money, usually based on a yearly rate.
There are two different kinds of interest:
The earlier we start saving, the more compound interest helps our money grow. A little bit can turn into a lot, as you can see in these examples:
The golden rule of saving is pay yourself first! Set up a system to make your savings automatic; you probably won’t even notice small amounts coming off a pay cheque each month, but this will definitely add up over time!
Knowing how much money you’re spending each month and how much you’re earning, as well as setting SMART savings goals and creating a proper budget, are all part of becoming more financially responsible and confident.