First thing first, this post is not generic to saving money but specific and detailed with early retirement and financial freedom as the focus. If you do not know what is financial freedom, read this post first. I will also encourage you to read about FIRE and watch this video. If you are here to learn to save money so that you can retire early and gain financial independence you need to have a solid plan. Here is a detailed guide to help you calculate how soon you can retire based on your current financial condition. You need to figure out that based on your current income sources and expenses how much you can save, and if you save that much in how many years you can retire? Not happy with the outcome? Here is what you can do to save more money to change the number of years you can retire in.
- Cut down your expenses
- Increase your income generating sources
But what if you are already working the longest hours possible? Let’s be real job market is in an ugly shape, finding a job is hard in the competitive job market and employs are getting paid less and less by every passing day. To make thing worse most of our skills are being replaced by automated machines and software that can do it better and faster. The technology is taking over our jobs and thus it is more the reason to stop relying on our job as an income source. What can be done? Invest money in businesses and ideas to generate passive income. Passive income is the money you earn through your investment without actively working to generate profit. To invest you need to save first so let’s dig in how to save money.
Before I move on to the ideas to increase your monthly saving I will like to pitch two ideas which will help you to stay focused on your goal and more organized.
- I recommend you should get yourself a Journal to set the numbers in ink, write down your goals and track your progress so that you can stay focused.
- It will also help to leave reminders about your goals and progress around the house where you can easily see them and be mindful of your financial situation. Scribble down your last week’s progress and coming week’s goals on a piece of paper and stick it your fridge and mirror. Don’t forget to regularly update that.
How to Spend Less and Save More?
1. Budgeting and Setting Goals
Now you will be saving money based on your income and expenses. Of course, it is easy to calculate your income but to figure out your expenses which may fluctuate from month to month can be a little daunting. And if you have never given much thought about how much you are spending each month or annually, it can be very mind-boggling. Here is what you need to figure out your AVERAGE monthly goals. Start collecting your receipts from all your months in a jar. Expenses, for which you do not get a receipt, just scribble them down on a paper and put them in the jar. At the end of the month take out the receipts and calculate how much you spend in that month.
Or you can get this amazing app Every Dollar for free to track down both your income and expenses. It helps you work on multiple devices and sync your data across your devices so you can have access to your budget wherever you are. Do this for three to four months and figure out your average monthly expenses. Now that you know your monthly expenses, the money you earn and how much you actually need to save it should be easy to calculate the amount by which you need to cut down your expenses.
2. Throw Your Credit Card Out of Window
Remember the first episode of season 1 Friends when Monica made Rachel cut her Credit Cards into tiny little pieces? You need to do exactly that! Not only it was a very empowering moment that changed the direction of Rachel’s life, but I would also say it conveyed a very strong message about credit cards. This is your real first step towards financial independence and saving money.
Research backs up the fact that if you are paying via credit card you end up spending more than if you were paying in cash. Credit cards have to be one of the worst scams in the world that are legal. They make you believe you have the money that you don’t have and encourage you to spend the money you don’t have and if you cannot return the money that you never had, they charge you interest! Get rid of that nasty thing right away. If you must shop online or hate to carry cash with you opt for a debit card, that way you only spend the money you actually have in your account.
3. Get Rid of all the Debit
Before you start saving for your retirement you need to pay off all your debts which are evidently increasing by the day due to the interest rate. Sooner you pay them off less you pay in terms of interest. Any monthly debt payments are robbing you of your income and thus you will not be able to save much. Use Debit Snowball Method to pay off your debts by paying smaller loans and moving to the bigger ones. This is more about behavioral change or a change in attitude that will help you stick to the plan by gradually increasing your paying off capacity. By paying off smaller loans you will be left with more money which will help you pay off the larger loan.
Another approach to paying off the debt is Avalanche Method by paying the highest interest rate loan (bad debt) first. This way the interest that is eating your income more will go down quicker. The plan is to pay the minimum payment amount of all your debts and put extra money into paying back for the debt with the highest interest rate. Once that highest interest rate loan is paid off, you can move to the second highest one. Read more strategies to pay off your debit here.
You should also consider refinancing your monthly car payments and mortgage installments to a lower interest rate options. It’s crazy how some people are not even aware that these options exist and just opt for smaller installments for longer duration without knowing it means more interest to pay. This can save you some serious money and you will be debt free sooner.
4. Backup plan Savings
Before you start saving for your retirement plan, you need to save for a backup plan. The reason why many people do not succeed in achieving financial independence is that life is unpredictable and they do not account for that. Life happens, and things go wrong all the time. Halfway through your plan to saving and investing for your retirement you lose your job or maybe a huge unexpected expense comes up or one of your income sources shuts down, so what do you do then? You have no other option but to withdraw money and spend from your investment until you get back on track. This can really be a setback for your progress towards achieving financial independence unless you have a saving set aside as a backup plan. You need to set aside an amount to cover at least 5 to 6-month expenses. Turn this money into a fixed deposit in your bank account so that your money keeps growing while sitting in the account and you can withdraw it in case of an emergency.
5. Open a Saving account
Convert one of your bank accounts to save money and automate your savings by set up your bank accounts to automatically transfer 10 to 20% of your paycheck in the saving account. This called Pay Yourself First Strategy which lets you save before you even start spending; this way saving comes before spending. This will be a great start to saving money as It will help you save money without actually doing anything actively about it.
6. Opt for a Low Budget Life Style
If you are going to start saving money, you need to spend it more sensibly. Now that you have your saving accounts ready and budgets and goals are in line, its time to start accumulating wealth through cutting down your expense. If you want to add up some serious numbers you will need to make some major changes in your lifestyle that actually is causing your majority of expenses.
- Switch to cheaper residential accommodations. If you have rented an apartment search for a cheaper option like a basement or shared living space.
- Buy clothes and shoes only when you absolutely have to (this goes for every other thing you purchase too). Instead, mix and match to achieve a new look with old clothes.b
- Repurpose your wardrobe by converting worn out pants in shorts and dresses in to crop tops.
- Stop buying ornaments, decoration pieces and jewelry for yourself. You do not need that junk.
- Buy smaller packaging of makeup products so that you pay for only the amount you will be using before it expires. Here is the list of some high end branded makeup products for less than 10$.
- Learn anything from YouTube tutorials. You can save a lot of money you spend every month on manicures, skin care, hair care, repairing electronics and car maintenance.
- When going shopping, make a list of things you “need” and stick to it. Do not indulge in impulsive buying of unnecessary items.
- Frequent dollar store and see what utilities and stationery you can get from there are an alternative to relatively expensive options you buy otherwise.
- Opt for cheaper brands while shopping for utilities, you will be surprised that in lower quality packaging they are the same thing and big brands are just cashing their popularity.
- Subscribe to offers for free samples and trial packages.
- Think about buying recycled or used things that are in good condition.
- Check the internet for cheaper options before making any purchase, do your research thoroughly.
- If you want to buy something, take a day or two to think if you really want it. This will help you control impulsive buying which is fairly common for online shopping.
- See if you can borrow (a dress or a gadget) from a friend or neighbor instead of buying it if you are going to use it once or twice in your lifetime.
- Cut your cable connection; it’s really expensive, instead, keep yourself entertained with loads of free content available for streaming online.
- Try walking or riding a bicycle to your destination or taking local transport instead of a cab or Uber.
- Instead of buying a membership to a gym go to walk or jogging in a park or ride a bicycle.
- Learn to cook and eat more homemade food. It is also as good for your health as for your budget. This amazing food blog Grubbin’With Me could be a great start for you.
- Pack yourself a lunch that you cooked rather than purchasing your meal.
- Instead of buying a Champaign or any other expensive gift take homemade frozen meals as a gift to house warming parties and baby showers. Believe me, they will appreciate it more. Here are some 20$ to 50$ gift ideas for newborn babies if you are interested. You should also check out these tips to save money while buying gifts by Gift Goonie.
- Be mindful of electricity usage, don’t leave the electrical appliances on when not in use.
- Cut down on your alcohol consumption (even beer), it expensive. Even better if you stop drinking it at all. Same goes for smoking and recreational drugs.
- Instead of going to bar invite friends over and have some beers while watching sports. That way you cut down on alcohol consumptions too.
- Try to Netflix and chill at your home with your friends instead of going to cinemas.
- You can also invite friends to hang out at your home instead of treating them at a fancy restaurant.
- Collect discount coupons and every time you shop to inquire about any special discounts available.
It is important that any extra income you make, say you get a side project or a new client, goes straight to your saving account. Do not upgrade your lifestyle if you get a promotion because that extra money needs to go in saving account so you can really retire early.
How to Earn More through Passive Income Sources
Majorly experts recommend three sources of Passive Income; Stocks, Bonds, and Real Estate but I can tell you there are a lot more opportunities but I will designate an entirely separate post for that as this is already very long and detailed.