If you’re living from paycheck to paycheck and can’t seem to break the cycle, then you’re not alone. Whether it’s an underpaying job or exorbitant rent holding you back, according to financial adviser from Honest Money, Jacqui Park, “There’s no time like the present” to stop spending frivolously and start saving. But before you downsize, start a side hustle, or cut up the credit cards, it’s worth noting the basics of saving, so when you do decide to forgo life’s little luxuries you can make the most of it.
We asked Park for her back-to-basics training on getting serious with our savings accounts. Read on for her wealth of knowledge.
How should we start preparing a savings plan?
If you’re serious about it, you need to look at your whole money picture, including your behavior. This isn’t about budgeting. The best spreadsheet or fiddly budgeting app will have zero impact if you don’t know the full story and you don’t take action.
- The first step is to know where you’re at. How much do you have in assets? In debt?
- Then, look at your flows. How much is coming in after tax? How much is going out? What are you spending on? Reality check: What are you spending too much on? Look at the last three months to get a handle on your patterns.
- Next up is to specify your goals. Is it a holiday, a career break? Know how much you need, and by when. Always include retirement, as well as a buffer fund.
Figure out what you need to put aside every week to hit those goals while also living well! We call this your Spendable, and it’s that first domino in the plan. If you stick to it, the rest of your money life is likely to fall into place.
What’s the biggest mistake you see with people trying to save?
There are a few. One is that people treat saving like it’s extreme dieting. So they either don’t do it at all because it seems like a huge mountain to climb and never take the first step. Or, they go too hard too fast and fall off the bandwagon.
The best idea is to start small. Once a week, consciously say "no" to that morning toast and coffee, or that cute top you saw at Zara on your lunch break. Once you’ve nailed that, you can try that twice a week.
The other major slip up is when people try to ‘save’ while also having credit card or personal loan debt. While psychologically it can feel more comfortable, this makes zero sense. Credit card debt racks up huge amounts of interest and it snowballs because that interest then gets charged interest. It’s like having a really bad cut, and you have some band-aids, but you decide to hoard them while the cut just gets worse.
How many accounts do you suggest having?
At Honest Money, we suggest three. One for essentials, one for fun, and one (or more) for savings. Automate the transfers to the other buckets from whatever account you get paid into. I also suggest setting up a savings account per goal, and as I mentioned before, you can do these with a different bank. Also, consider a high-interest savings account. I suggest naming them based on what they’re for, like ‘Holiday to Spain’, or ‘Fun’!
For more friendly financial tips head to Honest Money.