The secret behind finding the best credit cards is often overlooked. Surprisingly enough, this same reason helps you get through your debt review quite efficiently. What’s the secret? It is managing your finances, specifically your credit – better. While this isn’t an article about efficient credit utilization, if you can save and manage your money well, you can go into debt intentionally. This will signal to the credit bureaus that you don’t depend on debt. Besides, having “more” money is always a good feeling.
Establish a budget.
A budget is the best way to improve your finances. Without knowing how much money you have to spend in the different areas of your life, it’s almost impossible to enjoy any of the money you make with a clear conscious. “If I buy these shoes now, will I afford to eat at the end of the month” you might be forced to ask yourself every purchase? Although even thinking like this is a great start, some people buy the items and hope and pray that they have enough groceries to consistently feed the lion inside their stomachs.
When people hear about a budget, they often think it is designed to be restrictive. Although, in reality, a budget, when set up correctly, is meant to be mentally liberating.
Don’t expect to get your budget right the first time. If you have never created a budget before, it would be unreasonable for you to be good at making them. Take it month by month, and adjust where necessary.
Once you know where your money is to go, you know how much rent, food, and paying off your bills. It helps to know how much money you have remaining to start saving.
The two types of saving
There are two main types of saving in personal finances – macro saving and micro saving. Ideally, these should work hand in hand so that the micro saving can speed up the growth of the macro saving.
What is Macro saving?
Macro saving is when you do big-picture savings. This could be for your rainy-day fund, retirement, going on holiday, or the down payment of a house. In other words, large sums of money that take months or even years to slowly accumulate by being disciplined in the monthly contributions over a long period.
Tips for Macro saving:
Make this contribution first.
As mentioned earlier, these accounts are for the long haul with consistent contributions. The only way to ensure that something consistently happens is to prioritize it and do it first. Besides, the threat of hungry or debt collectors is a stronger motivator for saying no to splurges like the movie than adding to a savings account which fruit you might only enjoy in years to come. If the macro saving is important for you, do it first.
Automate your savings
Have you ever sat down on your bed at night and calculated the most optimal time to set your alarm to maximize sleep and think about things you want to do in the morning? Then you go to sleep, confident in the fantastic morning you are about to have, and fall asleep with a enormous smile on your face knowing how amazing your morning routine will be? Good on you for choosing to set that alarm.
Then your alarm goes off. It’s dark outside, and your bed is warm. Your eyes are baggy, and you have no commitments for the next 3 hours. Well, besides your morning routine and all the things you planned. But those are only for you.
What do you do? Do you jump out of bed automatically, or do you contemplate those extra 5 minutes? You know it usually doesn’t end there if you have considered hitting snooze.
Our saving is quite similar even though we have set up the ideal budget, with the perfect balance between purchasing all the fun things you want and achieving your saving goals. While it is possible to save every month manually, this adds a lot of additional resistance that doesn’t need to be there. If you automate it, there is no chance of overspending and not being able to reach your saving goals for the month.
Or, in the sleeping analogy, it is possible to lie in bed for an extra 5 minutes and still get up. If you were up and in the shower when the alarm went off, it would make oversleeping impossible.
Most people think of micro-saving when picturing the challenging part of a budget. This is saying no to a particular item or cutting out needless spending daily. There are “rules” to help you save more on everyday spendings, such as the Tomorrow-Rule or the Either-Or rule (They are explained at the end if you are unfamiliar with them.) But these are intended to help you prioritize your spending. At the end of the day, unless every time you use one of these rules and decide not to make a purchase, you then transfer the equivalent money to your savings.
Or have a way of putting your spending money back into savings after a certain period – micro-savings in the day-to-day won’t help you achieve your financial goals.
The Tomorrow Rule
The tomorrow rule states that if you see something you want to purchase, you can only make that purchase on the following day. This eliminates impulsive purchases from being caught up in the monument window shopping.
The Either-Or Rule:
If someone gave you the item for free or the value of the item in cash – which one would you take?
Saving money is excellent. It creates safety and enables you to make the more significant purchases in life. But at the end of the day – what is money good for if not spending. Always have intention behind your savings. Otherwise, you are not using the money for what it is intended for.