In this post, I share how I approach saving based on my financial goals. Increasing your savings boils down to two things: increasing your income and decreasing your expenditure.
When you’re just starting out , developing the practice of putting some money aside is a good start. However, I do not consider saving a final destination. I like to be specific about my savings so that I don’t dip into them for other purposes.When you know your savings are geared to something specific, you’re less likely to steal from your future self in that way.
In order to approach savings systematically, here are the steps I take.
What am i saving for?
The very first step is to identify what I am saving towards. Here are a few common answers:
- An emergency
- A trip
- A business idea
- A purchase like a car or house
- An investment opportunity
The reason this step is important is because it determines how and where you save your money.
Why do I want this?
Beyond what I am saving for, I like to examine the reasons behind this choice, especially with purchases that have a bigger price tag. You can carry out a risk versus benefit analysis before taking the plunge on something that’s not worth it.
How much does this cost?
The more specific you are, the better. If it is a big purchase that will take a while to save up for, overshoot the target to provide leeway for inflation.
Create a sinking fund
Hopefully at this point you have a budget. With this, you have an idea of how much money you can realistically set aside each month.
When you are saving with a purpose, have a specific place this money is going. If it is mixed with the rest of your income, it may be harder to track and easier to spend.You could put it in a separate money market fund, a fixed deposit account or even in a different currency.
A practical example
Let’s assume I want to buy a car that will cost you KES 500,000. If I set aside KES 2,000 per month, it would take me 20 years to buy a car.
At this point, I would find a way to cut down my expenses so that I can set aside KES 5,000 per month. I would open a money market fund for this goal and contribute this amount for 6 months. At the 6 month mark, I would start a tomato business. The projected profits are KES 30,000 per month. I would set aside 60% of that profit to the car fund. That way, I can afford to buy my car in under 3 years.
Was this example helpful? Let me know down below.
Automate your saving
If this is possible and affordable, create a system where saving happens with as little effort from your part. This can be a standing orderor an automatic deduction from your salary that goes into your pension. Alternatively, set a recurring date every month when you contribute to your savings pot.
Track and adjust accordingly
I track my savings through my budget which I discussed here.
One year in, you may realize that a car is no longer a priority. It’s okay to change course provided that you remain true to yourself and your financial goals.
How do you approach saving? Share that with me in the comments.
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“Always remember that your hair is your crown and your body is a temple; embrace it, love it and take care of it.”