Personal Finance

How I: save

It is generally recommended that 20% of your income goes to savings. Due to my hoarding tendencies, when I first started working, I decided to transfer 50% of my income into my savings account. I didn’t have many expenses at the time but after a while I realized that I was often dipping into my savings to pay off bills. That’s when I decided to get a strategy, so here’s how I save.

  1. Pay yourself first
    1. When creating my budget I started with how much I wanted to save and then worked backwards to determine how much I could allot to other expenses. I choose 30% of my income. I recommend seeing working out your full budget to see if this is realistic before moving on.
    2. TIP: We can get caught up when we save what’s left over after paying our bills but if we pay ourselves first we can stay on track with savings goals easily.
  2. Goals
    1. Next I determined my savings goals which include:
      1. emergency fund (glossary), which for me is 6 months of expenses
      2. $5,000 travel fund so I can take 2-3 trips a year
      3. a miscellaneous savings (aka my guilt free spending account) to use as a buffer when I have higher than usual expenses that do not merit dipping into the emergency fund (link to when its ok to dip).
      4. retirement: my goal is to max out my IRA contributions which in 2017 is $5500. Since 401k contributions come out pre-tax I subtract this from my income before determining my 30%.
    2. Each goal is its own savings account. Meaning I have 3 savings accounts with Ally. This makes it easier to measure progress toward each goal.
    3. TIP: How much you can contribute to each goal depends on your timeline. If you need $500 for a vacation in five months you’ll have to save at least $100 a month or change your vacation date.  
  3. Savings account
    1. I want to get the most out of my money so I’ve researched high interest savings accounts. (link here) I use Ally (referral?), its an online bank (glossary) and online banks tend to have higher interest rates than banks with physical branches. Side note: you also have the benefit of no ATM fees which is great when traveling (link to how I do it) Essentially Ally pays me a $1 for every $100 I save and because of compound interest (glossary) this adds up quickly. Can’t turn down free money.
    2. TIP: I have my checking and savings accounts in separate banks simply because I didn’t want to open a new checking account but this is also helpful to avoid making heat of the moment purchases with money in my savings.
  4. Direct Deposit or Auto Transfers
    1. A percent of every paycheck is automatically deposited into my savings account through direct deposit. At times I’ve also set up automatic transfers from my checking to my savings to be timed with my paycheck deposits. I have also broken down each transfer by goal. If for example, you set aside $1,000 of your paycheck to go to your savings account, the $1,000 is then distributed over the 3 goals which may look like $500 to emergency fund, $350 to travel and $150 to miscellaneous.
    2. The point is once I’ve done all the math upfront, the rest is automatically deposited/transferred to their respective accounts and I can save without thinking.
  5. Personal rule
    1. I try for my miscellaneous savings not to go over $500 (as a means of controlling my hoarding tendencies) so everytime it hits $500 I allow myself to splurge a bit.

This is how I do it.

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