Financial freedom is a dream for many people. People achieve financial freedom in different ways. Some inherit enough money that they never have to worry about money. Some start unicorn companies, build them for a few years, cash out, and retire.
Nevertheless, for the majority of the population, the path to financial freedom is through savings. It is putting aside a portion of the money you make consistently to build a nest for the future. What you do with the savings to grow them to be sufficient to take care of yourself in the future is a topic for another day.
Today, let's tackle step one first. Saving, and how to boost your savings.
In order to understand your financial goals you have to understand what money is. Money is not just zeros in a bank account, money is a status symbol to some people, it is self-esteem to others, while others view it as security.
This shows that money is not the end itself but a means to an end. We want money so that we can get something else. Therefore while defining financial goals it is paramount that you start by asking yourself, what does achieving that financial goal do for you? What is the intrinsic value?
It is important to get deeper when setting up the foundations of your financial goals since the saving journey will not be easy. You will need to exert yourself. If your motivation for the financial goal is frivolous you will quit when trying times come.
In addition to that you have to make your savings goals, SMART goals. They have to be Specific, Measurable, Attainable, Relevant and Time-bound. Making SMART financial goals concretizes the goal and you know what you are going for, how you will get it, and what timeline you are working with.
Having a solid foundational understanding of why you are saving and making the sacrifices necessary makes the saving journey all the more bearable and maybe even enjoyable.
Read Also: 10 Long-term Financial Goals to Set Today
Any financial plan starts out with a budget. A budget takes into account how much money you make, how much you should spend, and how much you should save.
There are two ways you can use your budget to improve your savings.
The first one is the budget can tell you that you are not making enough money. If your expenses are at a bare minimum and you still cannot save enough for your goals then you need to make more money. This would mean, working part-time, starting some freelancing work, or getting a better-paying job
Secondly, you can trim down the expenses. Many people do not work on a budget. Hence when they do an analysis of their expenses they are shocked by how much money they spend impulsively. Some realize that there are some small costs that they never paid attention to that accrue over time.
A good example is the cigarette example. If one smokes a packet of cigarettes a day, assuming a packet of cigarettes is 200 shillings and a bag of cement is 600 shillings, the smoker could be buying two packets of cement per week. A quick Google search shows that a two-bedroomed house takes roughly 80 bags of cement, which would mean that by only redirecting the smoking funds and nothing more, the smoker can buy enough cement to build a two-bedroom house in only 10 months.
Nonetheless, creating a realistic budget is being able to analyze both ideas. Valuing between making more money and cutting down expenses. The sweet balance between these two aspects of your budget will inform how you optimise your savings strategy.
To add to the creation of a realistic budget, you can use the 50/30/20 rules. This rules dictates that 50% of your earnings should be your needs, 30% should be your wants and 20% should be your savings.
While savings take the least chunk of money on your paycheck, over time and with compounding the savings grow significantly.
If you would like to increase the amount you are contributing into your savings account then you can cut down on your wants and redirect the funds into your savings account.
After you have come up with a realistic budget and have decided how much you need to save, it is high time you automate it.
Without an automated savings system, you run the risk of becoming impulsive and spending money meant for savings.
One way you can automate your savings is by going to your bank opening a savings account and having a standing order with the bank that at a certain time money will be moving from your current account to your savings account. That way you do not even think about it, or worse forget to put money in the savings account.
Secondly, if your employer allows you can authorize that your savings are deducted by the employer and paid into your bank account like they deduct taxes and pay them to the government. This way your savings money never even enters your current account.
Automating your savings reduces the friction points that make it difficult to save.
Read Also: How to Automate Your Finances in Kenya
There are two types of savings that you should have. A normal savings account and an emergency fund account. The main savings account is where you put money that you will use as capital to invest or as the principal to collect interest.
On the other hand, an emergency fund account is where you put money aside to take care of emergencies that would destabilize your life. For instance, a sudden illness, a sudden loss of a loved one, or a purchase that you have to make in that time and you had not budgeted for.
Emergency funds require discipline to work, otherwise, you can justify an impulsive expenditure as an emergency, which defeats the purpose of emergency fund saving.
Moreover, an emergency fund account helps your savings because it serves as a burger. When you get the sudden need to spend money, you go to the emergency fund and not the savings account.
This allows you to be flexible enough to invest your money in places where the money may be tied up for a while without stress. Secondly, it helps that you do not reduce the principal in your investments and sacrifice the gains the money would earn. Both these reasons are significant determinants of how much your savings account can grow.
If you are in debt and are looking to boost your savings it is essential that you figure out how to get out of the debt or reduce it significantly.
If you have debt that takes more interest than your savings accumulate, then you are operating on the negative. The goal is to reduce the debt to a level that our savings account is making much more than the debt so that we remain net positive. But if you can do without the debt, the better.
So if you are looking to start lowering your debt, a good idea is to start with the highest-interest debt first regardless of the amount. The amount might be small but since it is a high-interest debt, it is eating into your money more than the big low-interest loans.
Therefore, focus on the high-interest loans first and tackle them till your debt position is where you want it.
On the other hand, you can consolidate your debt if it will be better for your situation. Debt consolidation is where you take a bigger loan to pay off all the other small loans you have so that you are left with only one loan to pay. The bigger loan might have the advantage of being paid over an extensive period of time which reduces your instalment and allows you to save more and can also be a low-interest loan.
Last but not least is to celebrate your milestones and reward yourself. Being able to achieve your savings goals is not a small feat. Take a moment to appreciate yourself.
In fact, you can gamify the process with rewards after hitting some micro-goals along the way. This makes it much more fun and fulfilling to undertake the savings journey.
Whether you are saving for retirement or for a particular project, the steps outlined in this article will help you boost your savings so that you can get to your goal a little faster in a sustainable way.