A step-by-step guide to setting yourself up for financial success
Learning how to keep our finances healthy is something a lot of us aren't taught in school. Raise your hand if you knew what a credit score was before you were 15… Raise your hand if you knew how to file a tax return before you graduated… Yeah, we didn't either.
Most financial experts find this appalling because in many ways our finances govern our lives. Without proper financial education, we can get ourselves in a lot of trouble with debts, loans, and awful credit scores.
One of the key financial skills is saving your money. Most of us don't do it. This is understandable, we've never been taught why it's so important.
That changes today!
The Importance Of Financial Savings
Let's begin this guide by covering all the reasons why saving is essential to good financial health.
Most of us start collecting debt when we turn 18 and graduate from high school. We either head off to college and start picking up student loans or we enter the world of work and start stacking up credit card debts.
These debts make it harder to have financial stability in the future.
However, if you start saving when your next paycheck comes in, you will start to notice the following four benefits instantly.
Long term security
The average age that Americans start saving for retirement is 38 according to one study. Another study showed that only 40% of Americans over 40 were saving for their retirement. Most people end up working past retirement age so they can avoid spending their retirement in poverty.
While the best time to start saving for retirement was the day you started earning money, the second-best time to start saving is today!
Putting aside as much as you can each month now, will mean that by the time you are ready to retire you will be able to. Having your retirement fund ready to go, will take a lot of stress out of your last few years at work.
The ability to pursue your dream career
If you are able to save and pay off your debts your life will suddenly be filled with a lot more freedom. You will no longer be living paycheck to paycheck and you won't be tied to a job you hate.
Having a strong savings account means that you can afford to take risks.
You could quit your job to look for something that you enjoy more. Knowing that you will still be able to put food on the table if the change over takes a while.
If you need to retrain for your dream job, you will have the funds to go back to education.
If you want to start a business you can use your savings to set yourself up and you won't have to worry about immediately making a profit.
When you have savings to fall back on you don't have to consider every purchase so carefully. You can shop when you want to. You can go out for meals to celebrate special occasions or just for fun.
Having savings can relieve a lot of the pressure that bad fiances put on your life and make you a happier person.
A recent government survey found that more than 10% of Americans didn't have enough money in their bank account to cover a $400 emergency. This kind of emergency could cause over half of Americans to go into debt. This could be dangerous for most people, as 45% of American households have credit card debt.
Knowing that you have the money in the bank to prepare for any kind of emergency can reduce the stress you are under and can prevent you from taking on short-term debts – which can have cripplingly high-interest rates.
The Importance Of Financial Goals
Now that we have looked at why it is important to save, it's time to examine why it is essential to set your savings and financial goals. For most of us, these goals can make the difference between staying in a bad financial situation and moving on to greener pastures.
These goals could be anything from saving $50 a month to becoming debt-free in the next 3 years.
Your financial goals can give you clarity, purpose, and a step-by-step guide to what you should be doing with your money.
Here are 3 reasons why financial goals are so important.
You will gain an understanding of what you’re trying to achieve
Have you ever achieved anything important in your life without setting out to do it? The answer is, probably not. Setting goals are essential for getting the things we want out of life.
Goals can provide us with short-term and long term inspiration to achieve the things that are most important to us.
When it comes to our finances, our goals give us a reason to save. They make it easier for us to make the hard choices on a day-to-day basis. If you know you are saving for a vacation but you also want to buy an expensive item you don't really need – it's a lot easier to choose not to spend the unnecessary money. If you don't have the motivation to save, then the choice is a lot harder to make.
It will help inform your career choices
When you know what you are saving for and what kind of lifestyle you want to be living, then you know how much you need to be earning to achieve that.
Understanding the direction that you want your finances to be heading will not only give you a roadmap of how you should be spending your money, but how you should be earning it too.
If you put together a set of goals that are not achievable on your current paycheck then you may need to look into changing jobs, applying for a promotion, or taking up a side hustle. Knowing why you are working these extra hours will make them easier to do. And it will make achieving your goals even sweeter.
It will help you to create a nest egg for the future
Long-term goals can lead to long-term rewards.
Knowing what to save and how to save it can lead to long-term benefits. You may want to save for your retirement so you can travel around the world. Maybe you want to move to a bigger house in a more expensive city. You may want to get a sports car.
All of these goals require large sums of money. If you start saving early enough and are smart with what accounts you put your money into then these dreams can be achieved.
When you start setting your financial goals you will most likely surprise yourself with what you are capable of. You may even find yourself setting bigger and bigger goals.
Steps For Financial Saving
We have discussed the importance of saving and setting yourself financial goals, it's time to look at the pragmatic side of saving money.
While saving can be as easy as moving money from one account to another. You need to change your mindset to be successful at it.
Here are four things you can do to start saving money today.
Understand how much money you need to save
Know your income, needs, and lifestyle
The first step to financial healthiness is to understand your finances.
You can't improve your financial situation if you don't know what it looks like. So, we suggest you begin this process by sitting down with your finances and getting to know them.
You should start by looking at how much money you have, how much money you are making, and how much you are spending. Then you should look at how much debt you have and how much you are required to pay off each month.
Once you know all of this, you can sit down and figure out what your financial goals are and how much you will need to save to achieve them. You can then think about when you would like to achieve these goals. This will allow you to set your yearly and monthly savings goals.
Realizing that saving money does matter
Understand the value of money
Looking at how you are spending money will give you a good idea of how much money you are wasting each month. This could be money that you could put towards your savings goals.
The more time you spend looking at your expenses, the more you will realize that spending a little bit here and a little bit there really does add up over time.
It's a cliche, but most people don't realize how much they spend on coffee or cigarettes every month. If they were to switch to making coffee at home, they could be putting those funds towards their long-term financial goals.
You should also look into how quickly savings accounts can grow. If you put $10 away in savings every month then you will have $120 by the end of the year, and $1,200 in a decade. If you put away $50 a month, you would have $6,000 in a decade.
Imagine what you could save by putting away $100+ a month. Use the savings calculator to see how long it will take you to reach your savings goal.
Think of ways to generate money for your savings
Change your habits
You may have read the section above and thought to yourself, how am I going to find $100 every month to put into my savings?
Well, don't worry, we have some tips to free up a little extra cash in your life.
The first thing you should do is make sure that you aren't paying more than you need to when it comes to your household bills. According to Consumer Reports, households can save up to $500 a year by switching to energy-efficient appliances.
You should also try to switch the days your bills go out to one day at the start of the month. It is easier to save money throughout the month when you know how much money you have left to use.
Ways on how to make saving money easier
Work smarter not harder
As well as spending less, there are other ways to make it easier to save money.
You should start by setting up an automatic payment that moves your monthly savings into your savings account as soon as your paycheck comes in. It’s hard to overspend if the money is not in your account to spend.
You should also attempt to curb your excesses. If you buy more books than you read, sit down and work out how many months' worth of reading you own already. Set yourself a challenge not to buy any more until you finish everything you own. This trick also works really well for Makeup, clothes, crafting materials, and most other things that we buy too much of.
You may find it easier to track your savings by creating different savings account for each of your short and long-term financial goals.
Setting Up Financial Goals
Now, we are going to look at how to set up financial goals and why they are essential for living the life you want.
If you aren't setting yourself financial goals then you are setting yourself up for failure. You are more likely to overspend and collect debts when you don't know where you want to be. Financial goals are an essential part of having healthy finances.
To keep yourself motivated and on track, you should be setting yourself short-term, mid-term, and long-term financial goals. In this section, we will look at how to do this successfully.
Examples Of Financial Goals
- Building good credit.
- Owning your own home.
- Being able to retire early.
- Creating and using a budget.
- Paying off your student loans.
- Getting out of credit card debt.
- Learning more about personal finance.
- Paying off debt.
- Starting a business.
- Saving for a vacation.
- Saving for retirement.
- Creating an estate plan.
- Building an emergency fund.
- Being able to pay your bills on time and avoid paying late fees.
Short Term Goals
When you are putting together your short-term financial goals you should be thinking about things that you can do immediately that will have an impact on your finances.
The main reason to set yourself short-term goals is to give you the confidence to strive for the long-term ones. Nothing feels better than achieving a goal. But regularly setting yourself these small goals you can constantly feel like you are making progress.
Setting up a budget-tracker using a spreadsheet
A lot of people we have talked to are reluctant about putting together a budget. Most of them change their tune after they see how much easier this tool can make their life.
People often see budgets as restrictive. While they do set boundaries around what you can and can't spend, it is more accurate to consider them a roadmap to financial freedom. They will allow you to see ways to make your financial goals come true.
When putting together a budget, you should start by listing the amount of money you earn. Then you should make a list of your essential outgoings - rent, mortgage payments, water, electricity, gas, groceries, Wifi, TV subscription, transport costs.
This will give you a clear picture of the money you have left to play with.
Out of this money, earmark a certain amount for your savings account.
You then have the rest of the money to spend how you wish - let's call it recreational money. If you have any recreational money left over at the end of the month, you should consider moving it into a savings account.
When you know what you should and shouldn't be spending, it is easier to discipline yourself. You will be less tempted to spend frivolously when you can see the direct effect that it is having on your finances and if this spending is getting in the way of you achieving your goals.
We recommend doing this as a spreadsheet as it will do most of the math for you, but some people do prefer to do it by hand.
Create an emergency fund
The second short-term goal you should set yourself is to build up an emergency fund.
This is one of the most important things you can do with your money and should be something you focus on when you first start saving.
Financial experts recommend that we should all have an emergency fund that will prevent us from having to go into debt if we have some unexpected expenses - like your car breaking down, a pet getting sick, or an unexpected medical bill.
There is a little debate between the experts about how much money we should be putting aside. But it is generally recommended that an emergency fund should contain between 3 and 6 months of wages.
This means that if you unexpectedly lose your job then you will be able to feed your family and pay your rent while you sort yourself out.
An emergency fund prevents people from having to take out short term loans. While short-term loans can seem helpful at the time, they can often come with huge interest rates. This means that you end up having to pay back a lot more than you borrowed, which will leave your finances in an even worse state than before.
Putting together this much money can seem like an overwhelming task at first. But you can make the process easier by concentrating on the benefits of having an emergency fund at your disposal.
Mid Term Goals
Your mid-term financial goals should create a bridge between short and long-term financial goals.
We would class anything that other than saving for your retirement as a mid-term goal - this includes saving for a house, a car, or paying off large debts. These will be the goals that you are trying to achieve while you still have a regular income.
In our suggestions, we have also included some things you do that can improve your mid-term financial situation.
Apply for life insurance
Once you have someone in your life that depends on you financially then you should look into taking out life insurance. Most people do this when they first have kids, but we would recommend applying for insurance earlier than that.
If you go into business with someone then you should look into getting life insurance so that the business doesn't go under if you pass away.
You should also consider getting life insurance when you take out a mortgage with a partner. If you pass on, they may not be able to continue paying the mortgage and may lose their home.
A lot of young people who are trying to save money avoid taking out life insurance because they see it as an unnecessary expense. But it is very much the opposite, it is one of the best investments you can make for the people who are closest to you.
By taking out a life insurance policy, you can make sure that all of the important people in your life will be looked after if you die and can't financially support them anymore.
Pay off student loans
Everyone who is looking for financial freedom should set themselves the goal of becoming debt-free. Whether this takes you 2 months, 2 years, or 20 years.
As we discussed earlier, 45% of American households have credit card debts and the number of households with any kind of debt is closer to 77%. American personal debt is at an all-time high, as is student debt in America.
Most of us are in some kind of debt. This debt not only affects the amount we are able to save each month, but it affects our credit score. A credit score is what banks use to determine whether we are a good enough investment for them to loan money to.
Debts lead to a bad credit score and bad credit scores lead to us not being able to get a mortgage or good interest rates on our next loan.
It is in your best interest to pay off your debts and loans so that you can improve your credit score.
There are many types of loans that will fine you for paying them off too early. So, you should be aware of whether you have any loans like that before you start paying them off. However, make sure you do the math, the early payment fee may be less than how much you would pay overall in interest.
There are many different ways to approach paying off your debts, spend some time researching until you find a technique that suits you.
Consider goals such as buying your first home
When we first told you to think about setting some financial goals there were probably a few images that popped into your mind.
A big Christmas celebration.
The idea of taking two vacations a year.
Whatever your financial goals are, you need to find a way to make them happen. For the biggest goals, you may need to sacrifice a little to make them happen. But nothing good ever came easily.
You will want to work out how much money you will need to save for each goal and then set yourself a timeframe in which to save the money. Once you have a solid timeframe, you can look at what adjustments you will need to make to achieve your goals.
You may work out that you can buy your house two years earlier if you only go on one vacation a year. When you have a goal, the sacrifices feel a lot easier.
If you have really big goals then you may want to consider investing some of your savings to try and grow your wealth. While investing can be risky, choosing the right option can lead to a really big payout.
You should also shop around for the savings accounts that offer the best interest rates over long periods of time.
Some research has shown that we are more likely to achieve the goals that we visualize. So, when you are thinking about your bigger, mid-term goals take some time to visualize them.
Long Term Goals
Finally, let's talk about long-term financial goals - aka saving for your retirement.
It is recommended that we should be putting aside between 10-15% of our monthly income into a pension account like 401(k) or a 304(b). Or some kind of IRA if you do not have access to either of those two retirement accounts.
While this should leave most of us with a good amount of money to retire on, you may have grand plans for your retirement that you need to account for. The best way to make sure that you have enough money for your retirement is to make sure that you plan for it.
Calculate your retirement needs
E.g. annual living expenses during retirement
You will want to start by setting up a retirement plan or account if you don't already have one. It is never too late to start saving for your retirement.
If you have already started saving then you should look at how much you have already got in your account and then work out how much you will have by the time that you retire. Keep this number on hand.
Then you will want to break down all the basic expenses you will have once you have retired. Will you still have some of your mortgage left to pay off? How much will you have to spend on bills each month? How much will you have to spend on food?
You should then factor in any of the things you would like to do after you have retired. Do you want to travel once a year or more? Join a golf club? Do you want to take up a craft?
You should also factor in a sum of money to cover any medical bills that you might incur after you retire.
You should then think about what you want to leave for your friends and family after you pass on. Do you want to pay your grandchildren's tuition fees? Do you have money set aside for your funeral?
Once you have a final number it's time to look at whether you are saving enough to make this possible.
Increase your retirement savings
When you have your final number, it is time to look at how much you will have saved by the time you retire (if you continue paying in at the same rate as you currently do).
Does this match up with the number you worked out in the last section? If not, then it's time to consider putting more money into your retirement fund.
The earlier you can put the money into your retirement account, the better as it will have more time to accumulate interest.
You should also take some time to pick out the right type of account to put your long-term savings into. You may benefit from using an IRA if you do not have access to a 401(k). These types of accounts will give you better interest rates but they won't let you withdraw money for a certain amount of time.
Knowing how and why you are saving your money can help you to achieve your financial goals throughout your lifetime. With the right savings setup, you can be assured that you will be prepared for anything financially.
So, what are you waiting for? Grab a pen and a notebook and start setting yourself some financial and saving goals.