Money Management 101 | Follow these steps to start Saving Money

If you have let your finances let loose for too long and want to take control of your financial situation, it is time to buckle down and get serious. Maybe you had your blinders on and put your finances in the backburner. You can only ignore mounting debt or struggle financially for so long, and as much as it painful, it is time to face reality. I'm glad you are here today as that means you are planning to take some steps to manage your money. The only thing I request of you is to read through this guide from start to finish, follow along, and to TAKE ACTION. It's not going to be easy and progress may be slow, but each week and month that goes by will make a real difference to your bank account.

Today, I will be going over a simplified, step-by-step approach on how to get a better understanding of your finances and to start saving for your financial goals. Whether it is paying off your credit card debt, student loans, or whether you want to start preparing for the next stage of your life, such as saving up for a wedding or a down payment on a home - you would need to face the realities of your current financial situation first. Once you get a better understanding of your finances, only then can you move on and starting saving.

I also have a FREE budget template you can use for you to organize your finances - click here to get your hands on it. Now let's get started!

Step 1: Set a clear financial goal and define how much you need

It's easy to set a general goal like, I will save some money for a rainy day. But this sort of mindset will actually deter you from saving since there is no motivation on what and how much to save up for. On the other hand, you may have too many things that you need to save up for. You might have student debt, have a wedding come up, and would like to eventually save up for a down payment on a home. Whatever it may be, list those goals (ie. what I want to save up for) in order of priority.

After setting the financial goal, the next step is to define how much you need. This part may require some research on your end. For example, ask yourself the following questions:

Student loans:

How much student debt and accrued interest do I have after graduating?

How much interest will I be paying on my student debt in the next year or two?

When do I want to completely pay off my debt?

Buying your first home:

How much are homes in the area I want to live in - can I afford a condo or a house?

If I live 30 minutes outside of the city, would the prices of the home be much more affordable?

Am I aiming to save up 5%, 10%, or even 20% down payment?

Putting down 20% on a home would save you on mortgage insurance - but how much longer do I need to save up for 20% compared to a 5% or 10% down payment?

How much mortgage am I qualified to take out?

Once you are somewhat confident in the answers you find through research, talking to friends and family from their experiences, and even reaching out to experts in the area (ie. financial advisor, real estate agent, mortgage broker etc) - you will get a better idea as to how much you need. Better yet, leave a little bit of a buffer on the amount you need to save up for since, most likely in life, you will find yourself in a position where you are a little short of cash rather than having saved too much.

Step 2: Understand your income

While this step may sound self-explanatory, you will be surprised to find that many people don't know the difference between gross and net income. As an employee, your gross income or salary would be the amount in your employment contract. However, your gross salary is not the amount that actually gets deposited into your bank account every month. You will find that after certain deductions are taken from your gross salary, such as federal and provincial/state taxes, employment insurance, pension contributions, medical/dental insurance premiums, etc., you get the net amount.

You may find yourself wondering where all your money went after those deductions. Check your payslip to get a better understanding of the deductions. But reality is, this is your starting cash base. And this is before you even start deducting your actual living costs and expenses, which we will be covering in the next step.

Step 3: Understand your expenses

I want you to do a simple exercise. This would be easier if you use a debit or credit card for all your expenses. I want you to get your latest debit or credit card statement, and categorize your expenses into necessities and luxuries. Necessities are costs such as your rent/mortgage payments, groceries, transportation, medical, health (ie. gym membership) and basic hygiene (ie. face wash, shampoo, etc.). Luxuries are costs that go beyond maintaining your basic lifestyle, such as going out for drinks with your friends, excessive shopping, costly hobbies, etc.

Add up all the costs in each category and compare. You may be surprised how much you are spending on luxuries. Sure, there is more to life than the basic necessities - but question yourself, can you afford those luxuries? Can you possibly cut back a little? We will come back to these questions in a little bit, but first, let's now get to the fun part - finding out how much you can save.

Step 4: Calculate how much you can save

Now you know how much money is coming in and how much is going out, it is a matter of simple math. Take your net income less total expenses (ie. costs related to necessities and luxuries) to come up with your potential savings. Are you pleasantly surprised with what you find? Or are your savings meager? Or are you in a position where you are not saving at all since your expenses are greater than your income? Depending on your financial situation, you would need to determine if you are ok with this. If not, let's move onto the next step.

Step 5: Assess and Adjust

So you discovered that your current savings (or lack of) is out of sync with your financial goals. Don't worry, this would be the case for many people. It is a matter of stepping back and accepting that you need to do something about it.

Let's start off with how much you need. Let's say you are saving up for $12k. Now, decide when you need that money by - is it in 2 years or 3 years? Divide the amount by the number of years to come up with how much you need to save per year. Then divide by 12 (the number of months) to come up with how much you need to save per month. For example, if you want to save $12k in two years, you would need to save up $6k per year, which equates to $500 per month. This way, your savings goal is more manageable and you would be able see more clearly how your savings goal is attainable. Can you fit this into your budget? Is it a realistic amount to be saving considering your current income and expenses?

There are two ways to go about this - either (1) increase your income by getting a second job or getting a promotion, or (2) decrease your spending, which is probably the more practical thing to do because you can do something about it NOW. The next step is to cut down on your "luxury" costs, and then maybe even look into your necessities to further lower your expenses. For example, instead of going to Whole Foods for grocery shopping, you can go to No Frills. Or, instead of getting a gym membership, you can go to the community centre or even that free gym at your office or even just workout at home! Whatever it may be, look into your budget and your spending habits to see where you can cut costs to come up with the savings you need.

While this exercise might not be the most pleasant thing to be doing on a Sunday afternoon, you will find a few hours dedicated to this will be such an empowering experience. As they say, "A good beginning is half the journey" - so you have already taken a major step towards your financial goal by having a game plan.

Once you have a plan, the most important thing is to stick through it. Be self-disciplined in being on top of your budget and knocking down that savings goals month by month. You will go through ups and downs - you might be thrilled by how much you have saved, other days you will lose motivation and fall off track. Just remember that this is normal, and the most important thing is to snap back and know you are already better off than where you were before you started this savings journey.

Let me know in the comment section what is the number one thing you want to save up for?

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