Personal Savings - Part 1: Overview
A while ago I was talking to someone and the topic came up about savings and budgets. When I asked them if they had a budget, the person looked at me sheepishly knowing they should but confirmed that they did not. When I then asked them if they had a savings program, the look turned into confusion. “Do you mean a savings account?” No, I’m talking about a way to ensure you will have all your needs met at any point, present or future. That is when I saw the look of fear.
Yes a savings account is good but is just one piece of a savings program. After having a very long conversation with them I found myself having this same conversation a week later with another person. It was then I realized I was seeing a trend emerge. What’s worse is that in January of 2017 an article reported that 6 in 10 Americans could not handle a $500 emergency expense.
Now don’t get me wrong. I don’t have all the answers and am by far the last person you should take advice when it comes to finance. I mean I was just like the people I had talked to. I just happen to have come across a few people, classes and books that helped me. Seeing others in worse shape than myself I figured I would offer up what I do to build wealth.
I am not a financial advisor. Any advice I give is up to you to research before implementing.
With that said, I am not giving you secrets to become rich or live like Jay-Z or a celebrity. I am simply giving insight into a process that I learned and built into my own. Use it to build your own, learn what you want or even what not to do. That is up to you. Take what I say and mold it into your own. You may throw away some of what I say or most of it except a few pieces, that is fine. The important thing is to make it yours.
There came a time when I looked at my bank account after a few raises and was surprised to not see my balance moving very much. It just sat there like a sitting lake of water collecting more bugs than wealth. I had been working on increasing my job responsibilities and income. That was working and I was making strides in doing that. However it wasn’t adding to my bottom line. By looking at my bank account you wouldn’t have known. What I was missing was a savings plan. Most people say any savings plan is basically controlling two different pieces of a puzzle: income and expenses. I don’t completely agree. There is another part of the puzzle which I call optimization. Seeing that what I was doing wasn’t working starting me on a journey to understand what I was doing wrong.
Over numerous years and many trial and errors I’ve developed a process that works well for me. This series of posts is meant to explain my process in hopes it can help others understand where they lack in a savings program and how they might go about starting their own.
GET OUT OF DENIAL
First step in creating a savings plan is you have to know what you are spending. We all know what amount comes in and where but if you don’t know what’s going out and in what way then you really only have half the picture.
When I started out my research to figure out what I was doing wrong I came across the answer. What I had ignored was the expense part. I learned that without proper expense tracking, as income increases so will expenses. Of course while doing research I was able to reassure myself that I knew what I was spending my money on. Everything I was purchasing was needed and there wasn’t anywhere I could trim back on. This was probably the hardest first step to take. I needed to ensure that my thinking was correct. Looking back and seeing how resistant I was to doing just this meant I was in denial and probably knew something was wrong.
Once you know what you are spending (and not off the top of your head but tracking the actual expenses) you can move to the second item. Creating a budget. That is a way to control or at least have an expectation of what is going to be spent. This allows you to better plan for saving.
I realize I had neither. No way to see what I was spending from a broad perspective and no budget to use to determine if my spending was on track or if not, by how much. I had no analytics of my spending habits. Which if I don’t have that, how can I possibly expect to make change and grow wealth?
This meant I needed to balance my checkbook, credit card statements and other accounts. Ugh. I don’t want to do that. What a pain in the ass. My laziness pushed me to find a new service which had started up. It was called Mint. Yes this was years ago when Mint was new, unknown and before they were purchased by Intuit.
Mint is a free service that allows you to connect all your financial accounts and read those transactions into their system. It allows you to setup a budget and track the progress of that budget against all the transactions being reported by the accounts linked to your Mint account.
Once I setup my Mint account I was quickly realizing the denial I was in. One of the things I learned was that my “small” Starbucks habit was actually a $200+ a month habit. That is $2,400 a year! That is exactly what using Mint is suppose to do. Show me trends which I don’t see in the everyday.
Let’s assume you are moving to get yourself out of denial. You have signed up for Mint, added every one of your accounts (bank accounts, loans, credit cards, etc) and see all the transactions from those accounts. Your next step should be to start to create a budget. How do you do that? Easy. Go through your bills and setup what you pay every month. Rent, food, gas, car payments, cable, phone, etc. This step can take a few weeks to a month to get complete as you will forget about certain bills until they come in and show up as a transaction in Mint without a corresponding budget.
With your budget created and stabilized you will see items in it like: rent, auto payment, insurance, cable, mobile, etc. One of the items you probably do not see there is savings. This is why so many people get into trouble. They do not treat savings as a higher priority as their other bills. Think about that. You are putting all your thought into the present and little to none into your future. You have to change that thinking and make savings just as important (if not more important) as your other “requirements”.
A better way to think of it is most people put other people’s savings ahead of their own. Don’t believe me? Would you be late in paying rent? Not pay your car payment? How about not putting money into a savings account? Most likely you answered that you’d never be late for your rent or car payment but skip the savings account. Right there you are putting other individuals at a higher importance than yourself. Those other individuals (or companies) are using the money you give them to build their own savings and build their own wealth but who’s looking out for you? You should be your number one priority. The first thing in your budget should be payment to yourself, in the manner of a savings. After the payment to yourself, the rest is what covers “other people”.
THREE BUCKETS TO SAVINGS
How does one go about saving and building wealth? I follow a process I call the “Three Buckets to Savings”. Yes I totally just made that up right now but whatever you call it, it’s important that you believe it and own it.
The three buckets of savings are: Present, Emergency and Future.
This is what I call them. You are welcome to come up with your own terms as you wish. They aren’t very complicated. The Present bucket is just what it sounds like. It’s the bucket that you use to live every day. Specifically for one month at a time. The Emergency bucket is for…wait for it…emergencies (duh). The Future bucket is for long term savings, basically retirement, etc.
The basic strategy is to focus on filling the first bucket. Once that has been “filled” then the overflow will move to the next bucket and so on. With this the most important bucket is the Present bucket. Once all the Present needs have been met then the focus should be directed to the Emergency bucket until finally the Future bucket is the focus. The end state operating model will always have funds going into the Future bucket but it might vary depending on numerous factors. Of course as funds get removed from different buckets there will have to be an adjustment to refill those buckets.
In my next post I’ll tackle the present bucket. Stay tuned!