I have discovered that most of the challenges people face stem from a lack of control of their finances. Apparently, many people have a distorted view of the place and the value of money. While some overestimate money, others underestimate money such that they do not give thought to how much comes in, how much goes out and where it goes to. This nonchalant attitude has run so many households into financial crises.
In this article, I am going to share with you why savings is important as well as some strategies you can use to save a sizable amount by December 2021. First, let’s look at some statistics that show that the lack of savings is a major problem in the world today.
STATISTICS ON SAVINGS
According to an article by fool.com,
1. 42% of the American workforce live from paycheck to paycheck (including 25% of those earning more than $100,000 per year).
2. 29% of the American workforce have less than $1,000 in savings. Half have less than one month’s income saved.
3. The personal savings rate in 2014 was 4.4%. This means that out of every $1,000 earned, an average American spent all but $44.
4. Thanks to factors like high student loans and skyrocketing rent prices, millennials in America have a savings rate of negative 2%.
5. Approximately 10 million households in America have no bank account whatsoever.
6. 52% of Americans can’t cover a $400 unforeseen expense without borrowing or selling something.
7. Only 17% of the population have an emergency fund that can last three to five months.
8. Finally, 36% of Americans are not saving at all for retirement.
Although the statistics apply to America, I believe the situation is not different in Nigeria and other developing countries. The statistics give you an idea of the poor level of savings in the world today. Unless we educate ourselves about the need to save and budget, nothing will change. This is why I write this article: To help you understand where you lost it, pick yourself up and get ready to take charge of your finances in 2021.
WHY YOU LOST CONTROL OF YOUR FINANCES IN 2020
Before I divulge some strategies to take control of your finances in 2021 and beyond, let’s examine what went wrong in 2020 – why the New Year Resolutions you made on 1st January 2020 fell through after the first 2 months! We are taking stock of your financial life in the past year to ensure you don’t repeat the mistakes made anymore.
Lack of financial discipline in the way you manage your money is the major reason your finances went haywire. It doesn’t matter that you intended to save a certain amount every month. What really matters is that you have the discipline to “work out your intention” by creating a plan and sticking to it. That said, here are the specific reasons you lost control of your finances in 2020.
1. You Didn’t Have a Budget:
In my next article, you will learn in-depth how not creating a “written budget” for your finances literally cost you a lot of money in 2020. To achieve financial discipline, a budget is necessary!
Perhaps, you have negative thoughts about budgeting. You see it as a self-imposed constraint and as such, you detest it. You are not alone; I was there too until I realized what harm I was causing myself! The truth is this: If things must change, you have to DUMP that mindset. You must understand the purpose of a budget. It is created not to prevent you from spending money, but to ensure you have money for what is most important to you. Without it, you will spend money on impulse. So, you need to be convinced to make a budget for yourself as we get into the new year.
2. You Failed to Stick to Your Budget:
The decision to take control of your finances by having a budget is preliminary. Following up on it is where many people give up. Perhaps, you were disciplined enough to sit down and draft a budget for yourself. But, somewhere along the line, you ditched it for your old habit of financial uncertainty. Why so? Here are some reasons:
· You Didn’t Have A Concrete Financial Goal for Your Budget: Having a budget without a financial goal is like having a map without a destination in mind.
· You Got Distracted from Your Goal: You couldn’t contain the temporary pains of delayed gratification.
· You Didn’t Have an Accountability Partner: Many a time, all you need to stick to a new habit is to have someone you are accountable to like a spouse, reliable friend or coach.
3. You Spent a Lot on Liabilities:
According to my Rich Dad mentor, a liability is anything that takes money out of your pocket. Most of the things you were happy and eager to buy actually took money from you. In the long haul, you discovered that you had very little money left for the things that are important to you and financial hardship set in.
WHAT IS SAVINGS?
The Business Dictionary defines savings as “The portion of disposable income not spent on consumption of consumer goods but accumulated or invested directly in capital equipment or in paying off a home mortgage.”
To me, savings is income not spent or deferred consumption. It is not necessarily the absence of spending, rather, it is the intentional act of setting money aside for a particular goal or purpose. Any money that is not used for immediate consumption but preserved in a deposit account for future use can be referred to as savings.
Accumulating money for future use and delaying impulse buying can help you to determine whether what you want to spend on is a need or a waste of money. If you do not save your money and your expenses exceed your income, you can be said to be “living from paycheck to paycheck”.
WHERE DO YOU SAVE YOUR MONEY?
There are various ways of saving money. Some people make use of a jar, piggy bank or envelope system when dealing with hard cash. This is okay for short-term saving. However, long-term savers need a safer method of keeping money, which is why it is wiser for them to use a depository institution like a bank or cooperative.
In banks, there are different kinds of account in which you can save, e.g.:
1. Savings Account
2. Current Account
3. Certificate of Deposit
4. Money Market Deposit Account
These accounts offer varying interest rates based on certain terms and conditions. You need to educate yourself on their pros and cons to make an informed choice.
HOW MUCH MONEY SHOULD YOU SAVE?
How much you should save depends on your financial goals. To be considered “financially secure,” it is recommended that an individual or family should save at least 6 months’ worth of expenses. For example, if your household incurs a monthly expense of N50,000, you are expected to have a balance of at least N300,000 as savings to be considered “financially secure.” To reach this amount, it is recommended that you save between 10 – 20% of your net income until that amount is reached.
WHY YOU SHOULD SAVE MONEY
Your savings is money which you set aside for a specific purpose. It takes discipline and sacrifice to save. Now, it is tough to develop a saving habit without understanding why you should put in the effort in the first place. Here are some reasons to save instead of splurging:
1. Save for Freedom:
If for no other reason, save money because it gives freedom – the state of knowing that you have cash reserves to use whenever and however rather than feeling stuck in financial problems because you await the next paycheck.
2. Save for Financial Security:
Financial Security is only possible when you have enough money saved to cover your emergencies and support your future financial goals.
3. Save for Annual Expenses:
There are certain (household) expenses that are far beyond your budget. They require that you save for them.
4. Save for Retirement:
For government workers, retirement money is automatically deducted from their gross income alongside taxes so that they never waste it. However, for entrepreneurs and workers in the private sector, they must put money aside every other month for their retirement.
5. Save for Emergencies:
We don’t pray for them, but unexpected circumstances happen every now and then, ranging from health issues to car and house repairs, etc. It is wise to save for rainy days.
6. Save for Education:
Some people save in order to further their education.
7. Save for cars, homes, electronic appliances and gadgets.
8. Save to get out of debt.
9. Save for Investment:
For those who want to grow their wealth, this is the most pertinent reason for saving money.
Saving is important to the economic progress of any country as well as wealth creation for any individual. There is always an increase in productive wealth when people are willing to abstain from consuming their entire income. This is consummated when these savings are invested in productive ventures in order to earn more money.
HOW TO SAVE MONEY
Usually, people save by subtracting their current expenditures from their income and keeping the remainder. The problem with this method is that many a time, after subtracting expenditures, very little or nothing is left for savings.
Therefore, the RECOMMENDED method of saving is by Paying Yourself First. What this means is that you decide beforehand what percentage of your income will go into your savings account, deduct that percentage FIRST whenever you receive your paycheck, then live off the remainder. Although it takes greater financial discipline to tow this path, this method works, every time.
HOW TO DEVELOP A CONSISTENT SAVING HABIT
Once you have made the decision to save, the first challenge you will face is the struggle to keep the ball rolling. Without a clear goal and a concrete plan, it is easy to give up on your Savings Masterplan. When trying to save, it is important to take on the challenge as you would when trying to develop a new habit. This new, consistent saving habit is called Financial Discipline. To develop this habit, here are the steps to take:
1. Be Angry at Your Current Financial Situation:
Until you get mad and express dissatisfaction with where you are today, you will not have the willpower to do anything meaningful. You cannot solve a problem with the same mindset used to create it. Don’t just wish to save. Get your emotions involved by being so mad about your finances that you want to do something about it.
2. Increase Your Financial Intelligence:
After you realize what a financial mess you are in, the next step is to invest in financial education and learn how money really works. Visit blogs, read articles and take courses on Personal Finance. Depending on your situation and schedule, you may employ the services of a financial coach to guide you.
3. Make a Budget:
A written budget is a plan that shows where your money comes from and where it goes to. It gives you a sense of direction and makes the habit of saving easier to adopt. Experts recommend that you allocate, at least, 20% of your income to savings in your budget. You may allocate a greater percentage if you want. However, if 20% seems like a hurdle, feel free to start with a smaller percentage and grow from there. Savings is a habit that can be cultivated by taking baby steps.
4. Pay Yourself First:
You may automate your savings (using either a bank standing order or FinTech platform like PiggyVest). Hence, you will save without even thinking about it. Remember, your savings should be your first major expenditure after receiving your paycheck.
5. Be Mindful of Your Spending:
Before you buy anything, ask yourself, “Do I need this? Is there a cheaper alternative? Can I do without it altogether? Am I just buying this to feel good?”
6. Reward Yourself Periodically:
Find creative ways to celebrate when you cross certain milestones in your Savings Masterplan. It trains your brain to remember that good things come with hard work.
Savings, like every other endeavour or resolution, needs a masterplan, a systematic approach, and focused commitment for it to work for you.
Given the information shared in this article, I believe that you are well-armed with all you need to take your finances seriously in 2021. If you need help creating a customized savings and budget masterplan for the next year, I advise you to enroll for my 2021 Savings and Budget Masterplan Accountability Program which lasts for 30 days. I will guide you through such that you will be confident enough to create a Savings Masterplan for next year. By the time you complete the program in early January, you will have a personal finance blueprint that can guide you throughout the year. Enroll now!
If you cannot afford the program, there is a limited offer for a discount on my book, “How to Save Like A PRO: 30 Radical Money Saving Hacks That Can Help You Hit Your Financial Goals.” You can get it here.
N/B: This article is an excerpt from a webinar which was first published on my Facebook community – Financial Intelligence Forum (FiFo). Join the community to access my past and future publications.
Obot Essiet Jr. is an Associate Solutions Architect at LEAD Resources, a Financial Intelligence (FINTEL) Coach and a Co-founder/COO of Naiyuan Mart, a Chinese-Nigerian procurement and manufacturing company. He runs a blog and a community on Financial Intelligence. He is passionate about helping people journey towards financial freedom through practical financial literacy solutions. Obot Essiet Jr. loves writing, gardening, watching adventurous movies, cycling and playing chess.