With the American middle class squeezed by rising costs and downward socioeconomic pressures, sometimes a basic salary barely covers your necessities. Other times, lifestyle creep eats further and further into your annual budget, and you end up consuming all your available funds with little left over for the future. Despite what you might think, though, the road to saving more is relatively simple. Follow these steps to get started.
The many roads to building wealth
There are many ways to build wealth. One popular method that works especially well for high-income employees and a strong bull market is the FIRE movement, short for Financial Independence Retire Early. The gist of it is to earn as much as possible (usually more than $100,000 per person), cut expenses down to the minimum (sharing an apartment, getting rid of your car, not eating out, etc.) and save or invest the rest. Over a relatively short amount of time, FIRE proponents can build up a substantial portfolio and frequently retire in their 30s and 40s.
However, FIRE doesn’t work for everyone. If you don’t make so much, or you have high living costs, or the stock market isn’t doing so well, another method may be better suited.
At Moneyblade, we sincerely believe the key to beginning on your road to financial freedom is to increase your savings. Perhaps you can negotiate a raise or find a new job; on average moving from one company to another results in a 20-30% increase in salary. Maybe you can turn your hobby into a high-paying side hustle. Or it could be that you can capitalize on your current skill set and pick up extra income as a freelancer or independent content creator.
The goal is to increase your income enough that you can build up an emergency fund and then divert the extra to investing and launching a full-time business.
How to create a basic budget
A financial budget is an honest breakdown of how you spend your money. Budgets can be annual or monthly, depending on how granular your planning needs to be. Most people benefit from starting their financial planning with a monthly overview.
1. Calculate your after-tax take-home pay
Take a look at your paystub and your bank statements. If you get a regular paycheck, add back any automatic deductions to your net pay, including 401(k) contributions, savings, health and life insurance. If you receive other types of income, make sure to subtract taxes and other expenses appropriately.
2. Create a list of fixed monthly and variable expenses
These can include mortgage or rent payments, car payments, insurance, utilities, child care, transportation costs, student loans and credit card debt. Make sure to list your variable costs, as well, such as groceries, personal care and hygiene.
3. Pick a budgeting plan, such as the general 50-30-20 approach
With a 50-30-20 budget, you’ll try to spend half your take-home pay on necessities, roughly a third on fun stuff and the remaining 20% on building your savings and paying down debt.
The list in Step 2 may be less or more than 50% of your pay. If so, don’t panic. Take a hard look at your expenses first and make sure that you’re only including your real needs. If your expenses are high, ask yourself why. Do you live in an exceedingly expensive area? How could you reduce your expenses by taking small steps?
In general, economists state that spending a third of your income on housing is considered affordable. With the increasing lack of affordable housing, you may be spending more than that on your rent or mortgage. Accordingly, that could eat into your “fun” budget, or it might even be the reason you have no savings. The point is, the money has to come from somewhere, so you may need to cut back in some areas in order to afford other items.
Once you’ve picked a budgeting plan, the focus should be on savings. If you can’t cut your expenses much or at all, you still need to ensure you’re transferring money into an emergency fund and paying down your debt. Ideally, 20% of your pay will be enough to cover your debt payments and add to savings, but sometimes that’s unrealistic. So aim to save a starter fund of $400 to cover an emergency, then pay down your highest-interest credit card or personal loan debt. After that, you can add more to your savings fund and move on to other Wealth Pillars from there.
How much do you need to save in an emergency fund?
Say you’ve managed to pay down your toxic debt and you can focus on building your emergency savings fund. Financial experts recommend saving six months’ worth of expenses for that rainy day. But what does that really mean?
If you follow a basic 50-30-20 budget, your emergency fund should equal three months’ of your take-home pay. Assume that you may need some time to find a new job if you lose your old one, or that your rainy day could end up a monsoon. If it sounds like a lot to just have sitting in a high-yield savings account, you’re right. But building your savings fund is key to financial freedom.
What if you can’t save enough?
One way to ensure you’re saving 20% of your paycheck is to automatically transfer your savings as soon as you get paid. That way, you’re practically forced to limit your spending to the funds available – also known as the reverse budgeting method.
However, if your expenses are high and your income insufficient, you’ll need to increase your income. One way to accustom yourself to being a business owner is to work on a side hustle or freelance for extra cash. Many side jobs can eventually turn into viable business opportunities, so search for an option that appeals to you.
Bottom line
Saving itself is not hard, and there are many budgeting methods that can help you lower extraneous expenses so you can save more. But not everyone is able to save, even by cutting their costs as drastically as possible. In that case, it’s advisable to search for a side job to add extra income. Later on, once you’ve established a sufficient emergency fund, excess savings can go towards investing and launching a business – two keys to building wealth.
