Knowing how to save money is crucial if you want to become financially independent. Unfortunately, the problem of financial illiteracy remains unresolved, especially in the US, where 88 percent of adults claim high school did not prepare them for handling finances in the real world.
To address this issue, you must learn financial planning to avoid future debt and other economic challenges. Here are three money-saving secrets you must know:
Also read: Money Saving Tips: 8 Easy Ways to Save Money
1. The 50/30/20 Budget Rule
The 50/30/20 rule suggests spending up to 50 percent of your income on needs and financial obligations. Then, you must split the remaining half between 30 percent to non-essential expenses and 20 percent to savings.
50 percent for needs
You must allocate half of your income to cover essential expenses. If you spend more than 50 percent of your earnings on your needs, you are spending more than you can afford and should consider downsizing your lifestyle.
Downsizing means moving to a place with more affordable rent, paying for a more modest car, or commuting to work instead of paying for fuel.
Examples of bills that fall under this category include the following:
- Rent or home loan payments
- Utilities, including electricity, water, phone, and internet bills
- Car payments
- Minimum debt payments
30 percent for wants
You can spend 30 percent on non-essential expenses that enhance your quality of life. Remember that items under this category must be optional when you assess their importance. The “wants” bucket includes upgrade decisions, such as a more expensive steak or a pricier car.
Wants are all the extra expenses that make your life more enjoyable and entertaining. Other examples include the following:
- New clothes or accessories, even if you have a lot of them already
- Gym membership
- Latest phones or laptops
- Tickets to live events, like games or concerts
- Vacations or non-essential travel
- High-speed internet plan
20 percent for savings
Young adults should allocate 20 percent of their earnings to savings and investments. This fund ensures future financial security. You must have three months’ worth of savings stashed for living expenses in case of emergency, or you could save for retirement.
2. An Emergency Fund Is a Must
An emergency fund refers to the money you set aside for unplanned expenses or other financial emergencies. Some examples include home repairs, car repairs, medical bills, or even loss of income if you suddenly lose your job. Generally, you can use your savings for large or small unplanned bills that fall outside your regular monthly budget.
Without emergency funds, even a minor financial problem could set you back. You might have to borrow money, which is detrimental to your finances and health.
People struggling to recover from a financial shock have less savings to protect against a future emergency. They will have to take a loan, leading to debts that can be more challenging to manage.
An emergency fund is helpful for anyone, especially those with consistent income. If you rely on a regular paycheck, you must make it a habit to set aside some money for unexpected expenses.
Below are a few fundamental principles for starting an emergency fund:
- Set a goal: Outlining specific goals for your savings will help you stay motivated. It can help keep you on track, especially when only starting. A goal will also allow you to estimate how much you need to save and how long it will take to get there.
- Be consistent: Today, there are many ways to save money regularly. One practical approach is to try automatic recurring transfers that set aside a specific amount of cash weekly or monthly.
- Check your progress: You should be getting notifications of your account balance so you can monitor your progress. Seeing the amount you are saving can encourage you to keep going.
3. Save Money by Protecting Your Health
Saving as much money as possible can be your ultimate goal, but remember that your health should also be a priority. An accident can occur regardless of how careful you are, so consider medical insurance a necessary expense. Medical or health insurance can be the difference between affordable out-of-pocket fees and life-changing medical bills.
A minor sports injury or low-impact car accident could hinder your financial goals without insurance. These little accidents could cost you thousands of dollars, leading to debts.
If you are uninsured, do not wait to apply for health insurance and pay the monthly costs. If you are employed, ask your employer if they offer health insurance and inquire about high-deductible health plans to help you save on premiums.
These three money-saving tips should help you become financially stable sooner rather than later. If you meet your financial goals sooner than planned, you can think of new goals to work toward.