Whether your financial goal is the peace-of-mind of being secure, being able to live the “good life,” or going all in to become financially independent, the one unshakeable financial pillar to master is to become a saver.
It isn’t rocket science. Dave Ramsey likes to say personal finance is only 20 percent head knowledge and 80 percent behavior. To get over the mental hurdle, sometimes it helps to strip down a concept to its bare, honest essentials. So here are my six simple steps to saving:
- Consume less than you produce. In your normal, month-to-month routine, your total spending (everything) should be less than what you make. I use the free budgeting tool Mint to track spending (see my article on using Mint). Becoming a disciplined spender is key to your financial success. Keep both sides of the equation in mind. Keep your spending minimal, and also look for ways to increase your income. Both work together to leave you excess to save.
- Set up an emergency fund. Life happens. If you don’t have money set aside to deal with the unexpected, life will find a way to keep pulling you back down. Keep an emergency fund of at least $1,000 (and then 3-6 months of expenses after you’ve completed 3 and 4). Put this money in a separate account from your day-to-day so you’re not tempted to use it for non-emergencies.
- Eliminate debt. Every debt is a hole is waiting to eat the excess you’d rather be saving. Fill the holes in quickly and move on. If you have a lot of debt, I highly recommend Dave Ramsey’s work (the book Total Money Makeover or the audio series Financial Peace University) as it provides the moral support you need to stay committed to getting out of debt.
- Keep an upright mortgage. If your mortgage is upside down (you owe more than it’s worth), consider the amount your under like any other debt and fill the hole up quickly.
- Save for big purchases. Save for anything bigger than your monthly budget can handle. Planning a vacation? Buying a car? Set your budget and start putting excess each month into savings until you hit the goal.
- Get above zero. The most important measure of your financial state is your net worth (All of your assets minus all of your debts). Once you eliminate all your debts and get your mortgage upright, the equation gets very simple. In 2013, I paid my last debt and celebrated when my net worth finally reached zero! Now that I’ve climbed out of the hole, I can set my sights on financial independence.
What is the hardest part about saving?