How to Start Saving

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Whether you are new to saving money or you’d like to add to your nest-egg, you have come to the right place.  I hope to help you along your journey and provide you with tools to ensure it is a success.  The five steps below will lead you through the thought process and tools necessary to develop the Spirit of Saving.

1)    Determine what is important to you in life

In order to change your spending habits in a sustainable way, you have to feel like you are in control and that you can do the things that are important to you.  Otherwise, you will feel like you are being deprived and as with any strict diet, you will cheat and fall back to your old ways.  This brings us to the first step of our journey to frugal living, you need to determine what are the important things to you in life.  This is different for everyone, but it will help you adjust your spending accordingly.

These can be big things such as travel, fashion or eating organic, in which case you can adjust your budget to allow more money in these categories, but it will also help you direct your money saving energy on areas that will allow you to do more of the things you love.  For example, if you allocate 2000$ a year for trips, you could easily plan one big trip for that cost or you could make an effort and visit the same place for the same length of time for half the price, allowing you to take two trips and explore even more of the world.  Read Budget Travel: A Trip to Italy and France for examples on how to save money while travelling.

Eiffel tower
Eiffel tower

2)    Determine what you are willing to compromise on

Now that we have determined what you need and where you would like most of your money to go, we need to determine which areas are less important to you.  This will allow you to determine where you can cut your spending without feeling deprived.

Once again, this will vary a lot from person to person, but can include things like having a smaller cell phone plan, eating store brand food, not eating out as often or not owning a car.  Some things like going car-free will make a big difference in your budget, but even small things like choosing store brand food over the big brands will save you a few dollars a week on groceries that will quickly add up.

3)    Figure out how much you are really spending now

Before being able to make a budget you will be able to stick to, you will need to assess the current situation.  This may seem simple enough, but I must warn you, this is the HARD part, but it is absolutely necessary and you will not be able to succeed in changing your habits to save money without knowing where your money goes.  You should know where every last dollar of your hard-earned cash goes.  To track your spending, save all your receipts and bank/credit card statements and log your spending for the month in a spreadsheet.  Group your spending into categories that make sense for you such as: Rent/mortgage, Utilities, Insurance, TV & Internet, Cell phone, Transit/car, Groceries, Restaurants, Entertainment, Clothing, Travel, etc.

In order to get an accurate picture of your spending, you need to account for EVERYTHING.  This includes a coffee in the morning, the snack from the vending machine or the change you used for the parking meter.  All the little amounts add up!  It is important to log all of your spending to understand where your paycheck is going and to better distribute your money to do the things that are important to you.

This step will also allow you to determine if you are living beyond your means.  The total of your expenses should not exceed your revenue for the month.  Ideally, your expenses should be substantially less than your revenue to allow you to put your money to work for you earning interest.

Once you have added everything up, you will be able to spot crazy expenses (don’t worry, we all have them!). For example, you may realize you are paying 200$ a month eating out for lunches during the week. By making your own lunch at home 2-3 times a week, you could save 1000$ by the end of the year towards your dream vacation, for example. Read [Cost of meals] to see just how much money you can save by making your meals at home rather than going out to restaurants.

4)    Make a budget

Once you’ve determined where your money is going by tracking your expenses for a few months, you are ready to create your budget.  You will need to determine what your revenue will be after taxes (looking at last year’s tax returns will give you a good idea as to how much of your salary goes to taxes). You can then breakdown your monthly revenue into the categories you listed previously, making sure to allocate one category to savings.  You can start with the amounts you are currently spending in each category and adjust them until you can meet your savings goals, reducing the amounts in the categories you feel you could compromise on.

5)    Follow your budget

A budget is only a useful tool if it is followed.  It is important to regularly compare your actual spending to your allocated budget to make sure you are on track.  This can be done weekly, bi-weekly or monthly.  You may want to log all your spending on a weekly basis to see if you are on-track and re-adjust for the rest of the month at first until you get more comfortable with the budget.  Once you have a better feeling for how much you are spending and if you are still under budget then you can move towards monthly budget verification.

Here is a budget template that I use for our household budget.  Feel free to add categories as they apply to you.

What tricks do you use to save money?  Share your tips below.

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