A surprisingly small percentage of the U.S. population has enough savings to cover a $1,000 emergency.
This percentage is even smaller amongst millennials and twenty-somethings venturing out into early (or non-existent) careers.
Yes, having a savings account is a hallmark of True Adulting. But it can also be a veritable life-saver–in every sense of the term.
Savings can cover those plane tickets to Santa Fe for your grandmother’s funeral. They can aid in legal fees, credit card debt management, and medical bills.
Those tucked-away dollars can also minimize financial anxiety. (And trust me, I’ve had a lot of that.)
Yet how do you build a savings account you’re actually proud of, particularly if you are self-employed, struggling to cover your grocery bills, or still crashing on mom and dad’s couch?
I have a few ideas for you.
1. Use the right tools.
We are lucky to live in a digital age. Simply Google “money management apps” and the search results are positively crowded with options.
The same goes for financial advice blogs, how-tos, and personal finance calculators.
The key to crafting a fat savings account lies ultimately in your capacity to effectively manage your income and debt. And the right tools can help you do just this.
Opt for something that can give you a birds-eye view of everything financial in your life. I like Mint for this. It’s entirely free. Mint also helps you establish savings goals for specific expenditures, which can be valuable if you are saving up for a particular investment.
Sometimes a good old-fashioned spreadsheet can help. A simple venture into Excel can compile all of your current digits–you can even color-code!
Whatever you choose, opt for something that is easy, accessible, and not likely to shift to the back-burner. Another secret to effective saving lies in intention and awareness.
2. Understand your income to debt ratio.
You may have heard the phrase “debt to income ratio” from lender applications (and maybe even your parents). Wrapping your brain about this little ratio can help you understand your spending needs and capacity to save.
To calculate your income to debt ratio, tally up your average monthly income. If you are a freelancer or a self-employed individual, this can be tricky.
For now, just come up with your best ballpark.
Next, calculate your fixed monthly costs. These include mandatory credit card bills, student and auto loan payments, gas/transportation, rent, grocery needs, and the like.
In general, your total monthly debt should (ideally!) take up about a third of your income.
But for now, just note the number. It’s going to play a key role in the next step: establishing your budget.
3. Take steps to minimize debt and establish a budget.
I used to hate the word “budget.” It made me think about my mom’s spending sprees in K-Mart (ugh) and hiding little envelopes of cash all around the house.
Budgeting doesn’t have to look like this. Nor does your budget have to be made of steel. But it can be a guiding principle for both minimizing debt and growing your savings account.
Use your debt-to-income ratio to identify essential monthly spending (stuff you can’t not pay)–this value will always be subtracted from monthly income.
Then identify how much you spend per month on non-essentials (going out, clothes, books, coffee dates, Netflix, etc.).
Establish a budget that encompasses essential spending, non-essential spending and–you guessed it–savings.
That may mean cutting back a bit on non-essential spending. It may mean putting only $25 per paycheck into your savings account. That’s okay. Just come up with a concrete number–and then open your savings account.
Oh, and download a budgeting app or two to celebrate. I like Pocket Guard or YNAB.
4. Consider the divide-and-conquer strategy.
So how do you actually start growing that savings account you’re truly proud of?
Try the divide-and-conquer strategy. For every paycheck you receive, devote a certain percentage to your savings account. Calculate this percentage based on your budget.
For example, let’s say your monthly income is $3,000 and your fixed monthly costs are $2,000. This leaves $1,000 to devote to non-essential spending and savings. Given your spending habits, you may decide to set aside $200 for savings a month.
If a standard paycheck–delivered twice a month–is $1,500, this means syphoning off 6-7% of that paycheck into savings.
This may seem small, but trust me–those tiny percentages do add up. A $200 divide-and-conquer strategy becomes a $2,400 annual savings account!
5. Set rules for savings expenditures.
Most institutions will only permit you to withdraw from your savings account a limited number of times per month. But nothing else is stopping you from pulling out that cash for a quick trip to Thailand.
Savings accounts aren’t there to simply exist. They do have a purpose. Many act as emergency funds. Others are pathways to specific goals.
Whatever the case, set rules for savings expenditures and withdrawals.
You may want to set up two different savings accounts: one for emergencies and one for a dedicated purpose (a down payment on a car or a house, for example).
You may also wish to write down your rules for expenditures. Hold yourself accountable by sharing them with a partner, a parent, or a friend.
Don’t forget taxes, either.
Quarterly tax payments can be a grim reality for freelancers, bloggers, and self-employed individuals! Setting aside cash for annual or quarterly taxes in your savings account can ensure you maximize deductions and navigate returns with ease.
6. Rely less on credit.
If you have a tendency to swipe credit cards with abandon, pay homage to your savings account by using cash instead.
Sometimes having tangible money–rather than an elusive bit of plastic–can prevent you from creating more debt and encourage you to stick with your budget.
7. Breathe deep.
Personal finance doesn’t have to be the monster in your closet. You can save, provided you build a method and a vested belief in your own capacities.
Breathe deep. Celebrate whenever you put some pennies in the bank, even if they feel small. Visualize what you want to save–and then do.