Create a savings safety net
Many do not have plans for an emergency fund, not when you do not even have enough. However, think of an emergency fund, as the financial equivalent of “in case of emergency, break glass”—one that could save you from taking on debt or making other desperate moves.
To get your rainy-day fund started, set up automatic transfers so part of each paycheck gets funneled into a high-yield savings account. “Stash your emergency fund somewhere other than your primary bank,” recommends Ian Bloom, a certified financial planner (CFP) and owner of Open World Financial Life Planning in Raleigh, North Carolina. That separation will help you avoid the urge to dip into your savings.
Live within your means
Simply put, this means don’t spend more than you earn. The sooner you get on board with a budget, the better. “Tightening your belt when you’re used to a certain lifestyle, like eating out multiple times a week, is a lot harder than structuring a sensible cash flow for the first time,” Bloom says.You can start simple, by following the 50/30/20 rule: Earmark half of your income for basic living expenses, 30 per cent for fun stuff like shopping and traveling, and the remaining 20 per cent for long-term goals.
Pay yourself first
Make sure you’re setting aside the “20” portion of the 50/30/20 rule by automating your savings so that the money is automatically whisked out of your savings account before you even have the chance to spend it. Prioritising savings helps you hone in on long-term financial targets (retirement, down payment on a house) over in-the-moment desires (Internet impulse buys, dinners out).
If 20 per cent seems steep, start small and scale up. “A good savings benchmark is 10 to 15 per cent,” says Barbara O’Neill, a CFP and a financial management specialist with the Rutgers Cooperative Extension. “If you have high housing expenses or debt obligations, even four to five per cent can makes a difference. I advise people to save until they feel a pinch. That helps ensure you’re on the path to meet your long-term financial goals.
Harness the power of compound interest
Would you rather have N1 million today or N10, 000 that doubles every day? “Most people will choose N1 million, but N10, 000 that doubles up every day will end up sbeing more than N10 million. The penny puzzle highlights the power of compound interest, which enables your money to grow at a faster clip because you’re earning interest on interest as well as on your savings. Basically, it’s a fast, reliable way to make bank—and savers who start earlier can make the most of that force.