Building Savings is Really That Easy: there is only one thing you need to watch

From this post, you’d learn about the one thing that matters when it comes to building savings: your monthly cashflow. Building savings is really that simple: if your life costs less than the money you bring home you build savings, if it costs more you build debt. No point over-thinking it, and there is no place for delay – start reconciling your life and your money now.

Over the weekend I listened to a fascinating panel discussion about whether we save enough. The discussion was organised by a woman who is not only a good friend but also one of the most interesting and passionate writers on personal finance: Faith Archer from MuchMoreWithLess.co.uk.

At the beginning, there were no surprises: the panel was professional, technical and there was space for discussion. Where I started really interested is when the audience started to get involved. When I say audience, think that I probably increased considerably the average age of the attendees with my ‘lofty’ age.

There were different questions but the one that dominated the discussion was not ‘where shall I put my money?’. It was more like ‘how could I save when there is no money left after I’ve taken care of my life?’.

This got me thinking.

This made me think that we are over-complicating things and making them unnecessarily weighty when we drift into the technicalities of where to keep your spare cash or get on our high horse and start telling people how much they should have saved by a certain point in their lives.

You know, building savings is actually very simple and there is only one thing you should focus on:

Making sure that every single month your cash flow is positive

This is how it is, guys.

You have your life, on the one side, and your money on the other. You must make sure that your life always costs less than the money you bring home every month; and to put what is left somewhere (relatively) safe. You can decide on your investment strategy later, after you’ve build some cash (and there is a lot to be said about simplicity in investing as well).

There are three things you need to know if you are to make sure that you have money to build savings.

#1. Know how much your life costs

There are variety of ways to figure out exactly how much your life costs and most of these and painfully boring. You have a choice: be bored or never manage to put any money aside for rainy day.

There are many spreadsheets to help you along with this and any of them may do the job – this is up to you and what you feel comfortable with. Since you are on The Money Principle already you may wish to try our Monthly Budget Planner (find it under ‘our tools’).

You should know what you spend on your life to within couple of pounds/dollars – I call this spending line ‘God knows what’ and the mastery is to keep it small.

#2. Know what you spend on

If you do the previous task well, you’d know this as well.

#3. Know exactly how much money you bring in

Sounds kind of obvious but I’ve had members of my team under-estimating their pay by approximately £10,000 (down, I mean). Also, all your account should be in ‘after tax’ income – this is about what you bring in. Really.

By now, you know whether your life costs less or more than the money you bring in.

If your life costs less, you are already building savings; focus on saving more by making the difference larger.

If your life costs more than the money you bring in start looking carefully at both sides of this equation.

I wish I could tell you that you could generate a positive cash flow by (only) reducing your spending but often this is unrealistic.

What I’d tell you instead is to:

• Remember that the single purpose of money is to nourish your life.
• Make sure that you are living the life you really want (this one is hard because you’ll have to figure out your core values and learn to focus on, and spend on, only the things that matter to you and make your life better).
• Ask yourself can you live the life you want cheaper.

Once you’ve finished examining your life, turn to your money.

It pains me to say so, but in the Britain of today, it is very likely you don’t earn enough to support even a basic existence.

Re-direct your attention to making more money. Contrary to an influential opinion in personal finance circles, making money is not hard – you just ought to know what you can do well and figure out what value you’d contribute to other people’s lives so that they pay you.

You may wish to see some ideas about making up to £1,000 and ideas for making up to £300; now get up and try some of them. Or try any idea that you’ve come up with.

Finally…

You see, building savings is easy: you just ought to make sure that your life costs less than the money you bring in; you must make sure every single month. To achieve this:

• Get your money numbers right;
• Make sure that you live your life and that it is the life you want; and
• Find ways to make more money.

This is all.

Do you have savings and how long could you live off them if necessary? Do you have any interesting tricks to encourage yourself to build savings?

photo credit: Jeff Belmonte Contando Dinheiro via photopin (license)