How to Save Money Each Month: Practical Tips

Saving money - what’s the goal?

Of course, saving money means not spending part of your income and keeping it in the form of cash or other usually easily convertible to cash, liquid assets ( deposits, stocks, etc.). The reasons for saving money can vary. For the purpose of analysis, we can separate them into two types:

1. Internal (resulting from beliefs, dreams and goals)
2. External (resulting from temporary life expenses and covering upcoming financial obligations)

However, if we look at both of these seemingly independent reasons why people choose to save, we can understand that:

• If person X saves for intrinsic reasons he probably does so steadily, over a long period of time, and gives saving money a certain priority (on which, for example, he makes the psychological comfort that comes from a sense of financial independence dependent). In this way, she steadily increases a certain secured sum and will be able to use it in the future
• If person Y does not save for internal reasons - this is usually due to unawareness. Some people also believe that the income they generate is too low to start saving. In this case, however, those people don't take enough time to analyse their options carefully. What's more, they discourage themselves from saving because they consider the monthly 'savings' too low to begin with. This seems like a big mistake because, taking a long-term view, over decades a pretty substantial amount can accumulate from the savings. A person who does not feel an inner need to save is unlikely to have cash secured for the future.

The important conclusion is that while the internal need to save varies and not everyone has it, person X as well as person Y faces external situations in life that are often beyond their control, which require action and spending. Typically, if person Y has not secured for such an event beforehand, they will either have to resort to credit (which generates additional costs) or will not be able to meet the challenges.

Everyone faces situations in life that may require a certain amount of cash. These can be accidents of chance as well as situations in life that can be foreseen well in advance such as children's education, weddings and retirement. Other things that we can predict with relatively high probability include, for example, expensive car repairs or replacements or dental appointments. So we conclude that saving is in everyone's interest. Even more so in the interest of people who have not yet built up the internal need to keep a certain percentage of the cash they receive in their wallets.

Saving money is:

• Mental comfort
• Increased financial independence
• Increased sense of security
• A more secure future for yourself and your family
• Ability to cover random expenses without the risk of credit

The prospect of a prosperous life in retirement and the chance to fulfil dreams

IMPORTANT: Saving money is only one of several components of financial stability. Cash in the long term does not provide benefits comparable to successful long-term investments or increasing income, but saving money is the fundamental of both.

Financial cushion

Many have certainly encountered such a term as “financial cushion”. In a nutshell, it means a secured amount of saved money that is able to cover the necessities of life in a situation where a person or household stops recording any income. Its purpose is also to secure existence in the event of a crisis or job loss.

Some conservatively estimate that such a financial cushion should provide financial security for about 12 months of monthly expenses - with no decrease in quality of life. Others believe that 6 months is already sufficient, and “extreme” savers believe that the financial cushion should secure a minimum of 24 months of existence in a situation of zero income.

To calculate how much you need to accumulate in a financial cushion, you need to know the monthly cost of living - your own or that of your entire family. Based on these, you will be able to estimate what amount you need to save to build a small or very large financial cushion for uncertain times. 

Financial cushion - basic rules 

• As a rule, the money accumulated within the financial cushion should not be spent when there is no need for it. This is your “emergency fund” - remember it.
• The money stored within the financial cushion should not be held in the form of floating assets like stocks, mutual or ETF fund shares. You have to be sure that the valuation of your financial cushion is knowable and stable.
• Nor should they be held in illiquid assets like real estate, watches, art or other collectibles. Selling those assets takes time and if you need money “right now” there would be a higher probability that you will sell them at lower prices, which is undesirable.
• Liquidity and easy availability of funds may be crucial for the financial cushion. Its base should be domestic currency or a “basket” of foreign currencies. Alternatively, easily tradable treasury bonds to retain the purchasing value of the money over time.

10 positive financial habits

If we are talking about saving money throughout life, this means developing certain habits that will not only make the process easier. These habits can also make the final amounts saved larger and financial freedom come faster. What's more - this can happen without sacrificing satisfaction and significantly lowering your “level” or satisfaction with life. Here are 10 examples of very helpful habits.

1. Carefully analyse your financial situation. Calculate your income by subtracting fixed expenses and liabilities from your income. This will help you determine the appropriate amount you will be able to save each new month.
2. Plan your expenses and anticipate highly probable events in advance - if you don't budget, life will surprise you more often. Reserve an adequate safety margin in case the cost of living increases. You can anticipate certain events in advance - include them in your savings plan.
3. Record and analyse your expenses at least once a month. In the age of the 21st century, apps can be helpful. Also, many banks and institutions offer a detailed cross-section of monthly expenses. You can use it to understand your habits and adjust expenses.
4. Don't buy unnecessary things. Buying under the influence of emotions is not one of the thoughtful property choices. Don't go into overdrive - when there is an opportunity, buy a gift or donate funds to help those in need. It's all about the principle - buying on impulse “nice things” doesn't bring tangible benefits and won't make you happier long term as it will deplete your wallet
5. Don't be “fooled” by discounts. Acquiring discounted items just because you hang a -50% or -80% badge on them doesn't mean you should buy them. The expense remains an expense, even if the item is discounted by 90%. Foremost, buying goods that lose at least half their value on the day of purchase will not make you achieve financial freedom faster. Do you really need them that badly?
6. Don't be afraid of second-hand items. Buying goods and things “second-hand” not only saves you money. Lower consumption also means lower pollution and a good decision for planet Earth. If you need or want to buy something - ask yourself if it really makes sense to pay twice as much for a new item? Remember you can always find new things in charity shops too!
7. Try to increase your income. Saving is the first step toward independence, but it's increasing your income that can be the real catalyst for financial change. Don't be afraid to talk about a raise if you think you deserve one. If you've exhausted opportunities in one job, maybe it's time to take on another? Increase your competencies and skills so that employers want to reward you well.
8. Learn more about investing. Saving money is the foundation and a certain stage in achieving financial freedom. If you've raised enough money and built a financial cushion, you'll probably start looking around at how to increase the value of your money over time. Take care to educate yourself and learn more about the financial market - stocks, index funds, ETFs, precious metals or real estate.
9. Don't get discouraged. The basis of any success is consistency. If you save even 5% of your income and after a few months decide it's pointless - you'll probably spend the funds on unnecessary products that won't increase your level or satisfaction with life. However, if you save 5% for the next 30 or 40 years, you can guarantee yourself several peaceful years of life.
10. Don't go into overdrive and don't punish yourself. The basis of consistency is also forbearance for yourself. If a situation arises through which in a given month or year you didn't save as much as you wanted - don't worry. First - you can't turn back time. Second - random accidents happen to all people. Third - maybe in the next year you will be able to put away twice as much. Remember that your goal is long term. One poor year may be exceeded by excellence.

IMPORTANT: Remember that credit card debt is always bad, and so much money can be left in your pocket if you will never pay any credit interest rates. You should also always remember that ways to save money fast are on the horizon but remember - your savings goals should be realistic. Savings goals are not as crucial as persistent motivation to stay on the course. A savings account may be helpful. You could save money for years and decades, and waiting for long term results may be a smart way to save money. Down payment? To stay well motivated, you should prefer the option of payment as work is done, not before.

Saving money process in 6 steps

To turn the savings process into a success, consistency and patience are needed above all. Many of life's choices or phenomena depend on whether saving will be successful. These include the ability to cope with rare phenomena such as economic crises, job loss, a major car breakdown or illness. People often think that these phenomena are rare because they have never occurred in their lives, however, history shows that they happen quite often. What's more, your future in retirement or even your children's career path may depend on whether you save properly. So it is worthwhile to protect yourself.

1. Determine precisely what your goals are - this will make it easier to change old habits into new ones and guide you to achieve the set results. Remember that your goals should motivate you. The vision of fixing your car or losing your job doesn't seem like a sufficient motivator to you. Rather, think about the dreams you can fulfil by saving money. Think about places you can visit, helping loved ones or a peaceful retirement. Remember that at least your short term goals should be realistic and achievable. Satisfaction is within reach.
2. Household budget - if you are single, look into your spending habits. If not - review your finances with your partner. Even if the framework you draw is very general - you will see where the budget needs improvement and what point is its biggest weakness. This is already an important first step. You can use the traditional way to do this - a piece of paper and a pen, or computer programs and apps. You can also update your household's financial situation on a regular basis. If banks are doing it, why shouldn't you?
3. Expenses aside - analysing your budget should carry real consequences. It usually comes down to cutting expenses. For example, on unnecessary subscriptions to certain services, grocery shopping (perhaps it's better to do it less often but bigger), eating out, or the aforementioned 'trendy stuff' and transportation.
4. Pay off debts - unnecessary credit card interest or other obligations that you can cover even now - do it without thinking. They will generate unnecessary costs and stress. If your liabilities are larger than your current cash, give priority to paying them off before you start saving. Of course, if you have a mortgage - you don't need to save just to overpay it. Include it in your household budget, but also remember that the sooner you pay it off - the better for you. Don't be afraid to overpay it if you get extra cash injections.
5. Help yourself plan everything - thanks to new technologies, you don't have to remember everything and create an entire calendar with planned property steps. You can use banking apps and programs that will make basic obligations or transfers to a savings account happen automatically. This will save you time with less risk of forgetting anything in the flurry of daily affairs.
6. Diversify your sources of income - if you have extra time at your disposal, it is certainly worth looking around for an additional source of money. If you are very keen on maintaining your current standard of living, income from additional work, for example, can be treated entirely as savings. Thanks to the possibility of working online, an extra job doesn't have to mean commuting or leaving home.

Important: It is not true that only less wealthy people have problems with saving money. Lack of savings is also a problem for those who earn a lot. The ability to save depends more on psychological conditions than financial ones. Firstly, general satisfaction with life and functioning in a friendly environment facilitates this process. People whose life satisfaction is lower may want to compensate for it with new purchases. If compulsive spending turns into a very urgent life need, one should not be afraid to consult a psychologist, who can help with conversation or targeted therapy. It can turn into a problem that should not be underestimated.

Financial freedom and investing 

Analysing the aspect of saving money, we have already said that in the long term, holding cash is not profitable. Why? Because the purchasing power of money devalues over time due to inflation. This means, in practice, that today you can buy much more goods with GBP 1,000 than you will probably be able to buy with that amount in 5, 10 or 20 years. What conclusions can be drawn from this?

• A natural step during saving is to start financial education. This one will lead you to conclusions about your future and investments. Treasury bonds can protect your capital from inflation but will provide a rather meagre return above the inflation, which makes them seem an appropriate component of the defensive part of your portfolio.
• With adequate capital already accumulated and a financial cushion, you can consider what investment risks you are willing to take in order to earn potentially significantly above-inflation returns. Remember that your risk appetite and tolerance should be lower as you are closer to retirement.
• In the aggressive part of the portfolio, you can consider not only precious metals or real estates but also ETFs, as well as stocks in publicly traded companies. Historically, it is company stocks and index funds that track stock market indexes like S&P 500 or Nasdaq 100 have given incomparably higher returns, although it's worth remembering that history doesn't have to repeat itself and the stock market is a risky place to be.

Savings accounts are fundamentals but saving money does not guarantee that the value of your money will be maintained over several years or even more so, decades. Stocks or ETFs are very liquid and offer a wide range of investment opportunities. However, they are highly volatile, so consider whether you can withstand significant capital drops while expecting potentially high returns. Remember that financial education is key and should be part of the process of saving money.