A look into the saving habits of the frugal and money savvy.

piggy bankCredit: google images

Most of us don’t save. We kid ourselves that everything will be fine, spending on credit, using money we don’t have for things we don’t need. This is a route to financial ruin and the global banking crisis we are in is an example of that. But it doesn’t have to be this way.

Suppose you were to lose your job or main source of income tomorrow? Would you be able to cope? Would you have time to experiment with finding new sources of income? Perhaps you earn your money online, and enjoy the lifestyle it gives you. Would you be willing to give it all up to rush back to the 9-5?

Saving makes sense. In reality, you should save at least 6 months of current living expenses and not touch it. Leave it in a high interest account so it earns you money, but this is the financial security that people are desperate to have. It is only when your income is taken away that you really realise just how much you have and were relying on that income.

So how do you calculate 6 months living expenses? There are a few ways:

1 – Find your income after tax and check your bank statement at the end of the month to see how much you have left – this is the most truthful as it includes your impulse spending and shows you how much you spend to maintain your current lifestyle

2- Sit down and write a list of all your standard payments out – rent or mortgage, bills, car payments etc., and total it up. This, whilst being factual is not an honest way to look at the situation, as it does not include treats and extravagant purchases, such as meals out or expensive clothes. This will give you a bare minimum allowance, and is the least you should save. You will have to cut back on everything you spend on if you lose your income though.

3 – Take your monthly salary/income and multiply by 6. This the most simplistic method, but will allow you to maintain the exact lifestyle you have now.

Why should you do this?

desert islandCredit: firstchoice.co.uk

It will change your whole outlook on life. The financial security will allow you to change your attitude towards risk, entrepreneurship or just to how much money you can spend. It will be hard but there are foolproof ways to accomplish this.

1- Make sure that a percentage (at least 10%) of your paycheck goes directly to savings, without you even seeing it. This can be achieved by talking to your bank and requesting a direct transfer on the pay of the month you get paid. Make sure this goes into a high interest account that you do not carry a card around for.

2- If you want to save more than 10% (which will take you 5 years, but will be worth it, and you will not miss that 10% if you are living within your means) then you will probably have to cut expenditure. This can be done in lots of ways that will not impact you day to day life and may even be fun for you, such as cooking at home, having movie night at home instead of in the cinema, inviting friends over instead of going to a bar.

When you have a savings goal like this, and know the implications of achieving it, then motivation to save greatly increases. Think of it no differently from a pension, except this is a short-term emergency pension, should anything go wrong. When you have hit your goal, you will probably not miss the money at all, and will be free to think about putting your next savings into investments, or just spending on yourself guilt-free in the knowledge that your safety net is there.

These steps will allow you to be a braver person when any business opportunities come along, or just give you the ultimate flexibility – having a bad day at the office with the boss from hell? Tell him where to go! You will have that freedom, as you don’t need to immediately need to find work.

Start saving now and look forward to freedom tomorrow.