Before you pat yourself on the back because you’re got a plan in place, you have to take a look at your entire financial picture. If you’re socking away money in that IRA however your line of credit or credit card balance continues to go up each year, that’s not savings. If your debt goes up at the same time as your saving you’re not saving anything. You’re just moving money around and not making a good financial plan. To truly save you must remove that money from the financial shuffle you do monthly. You have to spend less than you make. Savings should be a predetermined rate set aside for a goal. If your money doesn’t have a purpose or a job it’ll wonder off like a small puppy.
The web talks about personal Saving Rates as the rate you’re saving. But that’s for people already saving. I like how Gail Vaz-Oxlade does it. She helps you calculate the % you have today to start saving. Here are the steps.
Step 1. Calculate your average income.
Get your monthly statements and add up 6 month worth of income. When I say income I mean all income, paycheck, commission, child support, retirement, disability, and cash. If you make your money in cash you need to know how much is coming in. If you don’t know because you’re spending it as soon as you get it, you need to track your cash income for a few months for this to work. If you had money deducted for pension, 401K, any investment or retirement add it back in. Divide that total # by 6. This is your average monthly income.
Step 2. Calculate monthly spend
Now you’re going to do the same thing for spending. Calculate how much you spend. You need to include credit cards, debit cards, and cash. IF you’re unclear around the cash you’ll need to track your cash spending for a few months to get this to work. Divide that number by 6 to get your monthly average spend.
Step 3. Calculate your savings
Subtract your monthly income from your monthly spend. Simple right? So if your monthly income has an average of $4400 and your spend average is $4300 your difference or savings is $100.00
If your income is greater than your spending you have savings. If however you end up with a negative number you’re spending more than you make and that’s a problem. We’ll deal with that at another time.
Step 4. Calculate your personal saving rate.
Since all the numbers we used were averages you need to calculate the actual % you should be able to set aside each month. Simply divide your average monthly income by your savings and multiply by 100.
$100 ÷ $4400 = 0.0227.
0.0227 X 100 = 2.27%
Your personal saving rate is 2.27%
Now you have a figure to start with. A lot of people say they don’t make enough to save. They need every penny to pay the bills. Saving isn’t just about money. It’s about a change of mindset. As a man thinks so is he. Here’s the deal the earlier you can build good financial habits, the better off you will be. Saving money consistently is an important financial habit. Bottom line start savings. I know the savings rate are awful, however making a small difference now can make a sustainable difference for your future. Take the loose change in your coat and start there. If you make saving automatic, it can be even easier to save money each month.
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