Learning to save money is one of the most important lessons for managing your finances. Saving allows you to avoid debt and pay less for the stuff you want.
Jump to article content:
- Why is Saving important?
- How to Save Money
- How much should you save each month?
- Should you save or repay debt?
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Why is Saving important?
If you save money you will be able to buy the things you want more cheaply. This is because it allows you to avoid using expensive credit facilities such as credit and store cards. You can pay for stuff outright instead of borrowing.
In addition if you have savings you can use them in a financial emergency. Everyone has unexpected expenses sometimes from car repair bills to broken appliances. Paying for these out of savings is far cheaper than using a credit card.
If you have debts you can use savings to pay these off more quickly. You creditors may accept lump sum settlements in return for writing off some of the balance.
However saving is never easy. It needs careful planning and a strong will. To help make it part of your monthly financial routine there are some simple techniques that you can use.
How to Save Money
If you are serious about saving money you will have to put a plan in place. Generally this will be made up of three elements.
The first is to make a target of the total amount you want to save. This will vary for everyone. However it is important. If you have no target you will not be able to measure how well you are doing.
Secondly you must save as soon as you receive your salary or other income. It is no good to say that you will get round to it at the end of the month. By this time the money will be spent.
The most important rule is that you must Plan to Save. Without making a Plan you will have no chance of building up any savings.
Thirdly you should set up a direct debit from your account for the amount you want to save. Transfer it into a separate savings account each month. This will reduce the temptation to spend it because it is out of sight.
How much money should you save each month?
If you want to save money successfully you need to understand how much you can afford to put by each month. There is no point in picking a number out of the air. If this is unaffordable you will never save anything.
The maximum you can ever save in a single month is determined by your disposable (or Surplus) income. You calculate this figure by deducting the total of your monthly living expenses from your total monthly income.
Having calculated your disposable income you then need to decide how much of it you can save. If you have unsecured debts the payments towards these must be deducted first before deciding on this amount.
The amount of your disposable income left over after your debt payments have been taken into account this is the amount you have available for saving.
Should you Save or repay Debt?
There is an argument that says if you have debts it is better not to save at all. Rather you should use all your available funds to pay off your debts more quickly.
This makes sense. The faster you repay the debt you owe the less you will ultimately have to repay. This is especially the case if you have outstanding credit and store card balances.
However even if you have debts saving something each month is still an extremely good idea. If you don’t then in a financial emergency you will have to borrow. This will end up making your debt situation worse.
If your Disposable Income is not sufficient to pay your debts it may simply be a case of reviewing your living expenses and tightening your belt. However if this is not possible you should consider a debt management solution.
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