How to save money each month from salary

People have written billion words on investment, but it is surprising that how little is written on savings. Getmoneyrich believes that if one is able to save month after month then 50% job is already done. The problem with majority of us is that we are al great spenders. We our have own logical and valid reasons of spending. Our mind do not work as how we can save but ‘it continuously tells us how we can spend’. I know there are people who are able to save decent savings each month but in due course of time they end up spending their savings on trivial things. What is the problem?

The problem is we do have a ‘reason to save’ clear in our mind. Let me give you a reason to save and then we can discuss ‘how best we can save’. We are saving to “Get Money Rich”, yes and only way you can get rich is “BY CREATING ASSETS”. Assets are created by buying financial investment options like shares, mutual funds, Exchange Traded Funds, Bank Deposits, Bonds, Real estate, precious metals etc. These assets are like a apple tree, it takes time to grow but when it grows tall and strong it gives us fruits regularly. Suppose you have $2,000, if you invest it in Bank deposits it will give you an annual income of say $120 (@ 6.0% p.a). But you know that $120 annually is not enough to manage your life. You will need at least $45,000 each year to manage your monthly expenses. Which means your savings of $2,000 is not enough. At the rate of 6% per annum, you shall accumulate at least $750,000 as your savings. So see the difference:

Generally by the time we accumulate $2,000 as savings we start getting new Ideas of how to spend this money in buying a new i-phone, LCD TV, and what not. This is the reason why so much emphasis is done on investment because not only it locks your money (keeps you away from spending on trivial things) but also gives you annual returns (like @6% p.a.) that you can use to manage your monthly expenses without eating-up your “ASSET BASE” (in this case $750,000)

But having said that I will still insist that if one is able to save each month and resist oneself from the temptations of spending our hard earned money on trivial things than half battle is won. So lets see how we can save our hard earned money. Later on you will find other good articles in this blog that you can read about ‘investment’.

1. Pay yourself First

This is perhaps the most effective way to save month after month. First of all open two bank accounts one will be your salary account where each month the pay cheque gets deposited and the other will be your savings and investment account. Budget your expenses for each month like how much you spend on utility bills, gas, groceries, vegetables etc. Suppose your monthly income is say $100 and your budgeting says that your total expenses is say $65, it means $25 can be your savings. But there are always some emergency expenses like car break down, child health etc. So keep aside $15 and the balance $20 will be your savings. This is that savings that no matter what you do you will never require to manage your monthly expenses. Pay yourself first this amount. How?

Remember you have two bank accounts, ‘salary’ and ‘savings’. Now in this world of online banking system transfer this $25 from your salary account to your savings account. This transfer of money should be done the day pay cheque gets deposited in your salary account. Before you pay any bills, incur any expenses, the same night your pay cheque is in your account transfer it to your salary account.

This gives you an advantage that if your have less in your hand for spending (money in salary account) the better. Otherwise if you have excess your mind plays games and generates ideas of lavish spending options. This is the reason why the world richest man Warren Buffett leads a humble life, because he knows the power of ‘paying one self first’ than paying for the lavish living.

2. Open a Piggy Bank in Your Home

I have already told you that your mind plays game with you, if you have too much liquid cash in your wallet it will give you new-ideas of spending it on trivial things. So lets see how you can pay a trick on your mind too. If you have kids you can also involve your kinds in this game. Buy a piggy bank and set it up in the middle of your house. Sit with your family and decide & picture what you will buy when this piggy bank is full. Tell them that they can save anything from small coins to big notes. The objective is to save heavily so that the piggy bank gets full in quick time and your family will be able to buy their liked object.

This type of exercise does two things for your good, firstly the family realizes that if they want to buy a thing it takes time, effort and patience to earn that thing. Secondly it removes the option of immediate gratification. Make it a habit of your family that in case they want to buy more they shall discuss with family and start a piggy bank for the same. This cultivates the habit of savings which they will cherish all their life.

3. Your pay rise should also reflect on you “Pay You Self First” scheme

It is always very satisfying to get a pay rise. But generally we end up spending our pay rise by increasing our expenses column. Instead one must first fill their asset column and then shall spend. The proportionate increase in the salary shall also reflect in ‘your pay yourself’ mechanism. Till lat month your salary was $100 and your were paying your self $25. If your salary grew to $120 then you pay yourself should also rise proportionately to $30.

4. Set a piggy bank for yourself and your wife

This piggy bank is slightly different from your home piggy bank. Leave that piggy bank for your children. This new piggy bank shall be used for bigger expenses like Home, Car, Child’s higher educations etc. Suppose you decide that you want to buy a car. It is very easy to get car loans these days. If your decide today tomorrow you will get a car loan and within a week the car will be at your door steps. But I will suggest delay your gratification. As a rule of thumb of getmoneyrich, instead of paying just 20% as down payment for a car you must pay at least 50% as your down payment.

Suppose your want to buy a car whose price is $13,350 (INR 6,00,000) Ideally a bank will pay you loan for 80% of the cars value ($10,700, INR 4,80,000). But do not go by this temptation, instead wait till you have 50% (instead of 20%) amount ready for down payment. It means you are not allowed to but the car till you have $6,675 (INR 3,00,000) in your kitty. Similarly your can do while you decide to buy your house. Set aside each month a sum of money that on a later date you can use for buying your house or your car.

REMEMBER THAT YOU CANNOT CONSUME YOUR ASSET TO BUY YOUR CAR AND YOUR FIRST HOSE.

5. Start Accumulating Quality Stocks that pays high dividend Yield

Conclusion

Saving money each month is difficult. But setting up rules as discussed above will not only manage your short term and long term expenses but will also make you financially independent.

Have a happy spending.

Do not forget your goals of Savings…We are saving to “Get Money Rich”, yes and only way you can get rich is “BY CREATING ASSETS”.

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