Start to save money and increase your savings ratio

 

Do you know how much money you spend each month? That is the most basic question on the way to financial literacy. 

 

FILIP knows exactly how much money they earn and spend each month and therefore how much money and what percentage of their monthly income they save. 

 

Short term sacrifice leads to long term pleasure. 

 

The key to financial literacy, financial freedom and ultimately financial independence is to build good financial habits through a) a change of your financial mindset and b) living below your means. Therefore being able to save a percentage of your income each month. 

 

The majority of millionaires are self-made and live way below their means and this is how they become millionaires in the first place. 

 

Stop getting further into debt, start saving and become addicted to saving! 

 

 

Save money – Live below your means 

 

There are two ways you can stop getting further into debt, start to save money and increase your savings ratio.

 

 

1) Reduce your expenses

1. Make a list of your expenses in the next 3 months or if it is easier review your expenses in the last 3 months. Organize the list of expenses into 3 categories: necessary, most valued and avoidable or unhealthy expenses.
2. Identify expenses which are absolutely necessary each month. The main categories are accommodation, food, transportation and tax. Tax expense is the largest necessary expense for most people and usually gets deducted before they receive their salary net of tax and therefore may not be easily noticeable.
3. Identify expenses in areas that you value most. Spending on these areas gives you a sense of satisfaction and happiness. These can be things like coffees, sweets, travel, gadgets etc. This can be a long list and every individual is different therefore each one of us has their own list of things they value most in life.  
4. Identify expenses which can be avoided or reduced without sacrificing your quality of life or things that you value the most. These can be expenses incurred while making purchases on impulse or without adequate research on the different available options. These can also be expenses which in large quantities can be harmful to your health e.g. cigarettes, food with lots of sugar etc.

 

Avoidable or unhealthy expenses

Your immediate action should be to reduce or completely eliminate expenses put in the last category.

 

Necessary expenses

Within 3 months review the expenses incurred in the first category and assess if you are willing to make lifestyle or habit changes which can reduce these. For example, reduce your tax expense liability by contributing a higher percentage of your salary towards your pension fund, rent a smaller apartment or rent in an area which is not close to the underground, eat in restaurants less times per month, buy a cheaper car or use public transport.

 

Most valued expenses

Lastly, review expenses of the second category. As these relate to things that bring you joy and happiness try not to eliminate or drastically reduce these expenses but rather consider postponing or optimizing some of these expenses. For example, you can postpone a big trip to next month or you can get free coffees by joining the loyalty scheme of your regular coffee shop. 

 

While reviewing your expenses be disciplined. Discipline is choosing what you want most over what you want now.

 

We have prepared several articles on different types of expenses and how you can reduce, eliminate or streamline these by making some simple decisions.

 

 

2) Increase your income

 

There is a limit in how much you can reduce your expenses each month. 

 

Have you considered increasing your income may be a more effective way in order to both increase your savings ratio and live the life you aspire?

 

 

a. Invest in yourself

If reducing your expenses is not sufficient look into becoming more equipped and valuable for the marketplace by obtaining the skills which are popular and required in the marketplace. 

 

In this way you can increase your income by negotiating a payrise in your existing job, finding a better paid job or starting a second job for additional income. 

 

 

b. Earn additional income through your work

 

You can increase your income by working in a field where there are many available jobs e.g. food delivery, waiter etc. but this option has limited potential on the amount of money you can earn per hour. 

 

It is best to find something you are good at and enjoy and excel in it. This can be done easier in an area where you already have expertise e.g. you can teach students in a subject you are knowledgeable; you can guide tourists in your hometown etc.

 

 

c. Earn additional income by renting or investing (“Passive income”)

 

There are other ways to earn additional income each month without trading your time for money such as letting your spare room, buying stocks which provide high dividend yields, keep your savings in high interest accounts and many others. 

 

We have prepared several articles on income generation where we go into more detail on different income streams and how important it is not to rely on one source of income. 

 

Until the next article or video, let’s all make informed financial decisions!