A couple of posts ago, we talked a little bit about savings strategies. I wanted to pick back up on that for another post because I think it is nice to have additional information on this so that we can design a strategy that fits our own life.
What savings strategies have we talked about already?
We talked about saving to an emergency fund. The goal balance for your emergency fund will ultimately depend upon you. I mentioned that the general rule of thumb is to have 3-6 months of your monthly expenses saved in your emergency fund. Additionally, I talked briefly about Dave Ramsey’s suggestion to save $1000 into your emergency fund and then move on to tackle your debt. Both are viable strategies – saving 3-6 months of your expenses might take a while whereas Ramsey’s strategy allows you to work towards your goal in baby steps that help you visualize your progression. A lot of personal finance is a mindset coupled with discipline.
What other savings strategies are there?
There is a book out there called The Richest Man in Babylon written by George S. Clason. I highly recommend this book because it goes deep into the mindset on personal finance and how to remain financially disciplined throughout your life. This book suggests setting high level percentages of your budget to Living, Debt, and You. Yet again, we are here budgeting to ourselves. Essentially, your living expenses are your mortgage/rent, food, and anything that you need to survive. Debt is your consumer debt, for example, your car, your credit cards, etc. And you are you, this is your savings and your investments. The suggested break out is to save 10% of your pay, spend 70% of your pay on your living, and spend 20% of your pay on debt.
This might not be feasible in your situation. These are just guidelines. If you can only do 5% of your pay to you, 25% to debt, and 70% to living, do that. These might be ok goals to consider though. If it does, use the compounding interest workbook in the previous post to see just how that % of your pay can compound for whatever other assumptions that you enter for a nominal rate of return.
That might sound fine, but what about things that you want to purchase but might not necessarily need? There is a rule for that too, known as the 30-day rule. The 30-day rule suggests waiting 30 days to purchase any non-essentials. The idea here is that the delay might help you realize that you might not actually want the product. Think about how much money we could all save if we avoided purchasing those non-essentials for that long. I, myself, might even have forgotten about it completely.
Is debt stopping you from saving your money?
Large debts are no fun, but sometimes it is necessary at the time. We all encounter this problem in our life. We must pay it, that is obvious, but there are two debt strategies out there that I know of that have caught steam over the years. The first is the snowball method. The idea here is to make your minimum payments on all of your debts except the one with the lowest balance. Pay any extra money that you can to the account with the lowest balance. Once that account is paid off, take the total that you were paying on that account and then apply it to your payment on the next lowest balance account. Over time, your payment towards your debt will grow, like a snowball being rolled in snow.
The next strategy is called the avalanche strategy. The idea for this strategy is to make your minimum payments on all your debt and then pay any possible extra towards the account you have with the highest interest rate. Once that account is paid off, take the money that you were paying on that account and then move on to the next highest interest rate. Work your way down until you reach your final account. With this strategy, you are saving money via the interest you are saving, and you are paying debt. So, it is like a win-win.
Those are some high-level debt payoff strategies. Note that these strategies are just guidelines. Things change. Circumstances are fluid. But the idea behind Knowledge Exchange is to provide you with tools so that you can either use them to boost your confidence in your finance education or adjust them to your own situation.
Disclaimer: I am not a financial advisor. The content on knowxchange.com or “this site” are for educational purposes only and merely cite my own personal opinions and experiences. In order to make the best financial decision that suits your own needs, you must conduct your own research and seek the advice of a licensed financial advisor if necessary. Know that all investments involve some form of risk and there is no guarantee that you will be successful in making, saving, or investing money; nor is there any guarantee that you won’t experience any loss when investing. Always remember to make smart decisions and do your own research!