Do you want to start saving money, but cannot put aside a single cent of your monthly salary?
Although it is sometimes difficult to save anything, the problem is often due to the mismanagement of the budget. Spur-of-the-moment spending, purchases that are not strictly necessary, and not paying attention to prices are just three of the reasons that can quickly erode salary and cause individuals to arrive at the end of the month with nothing left to set aside for the future.
A variety of financial instruments can be used to save money, like ISAs, tax-free savings accounts. These instruments help savers increase their starting capital through interest earned over time. To find out how much the interest might amount to, there are some tools, such as Cash ISA, or stocks and shares ISA calculator, also available online.
However, before starting to use any kind of financial instruments, however, it is essential to learn how to set aside small or large sums each month. In this regard, there are different methods and rules that may be applied. In this article, we will present three of them: the 50/30/20 method, the 1% rule and zero-based budgeting.
The 50/30/20 method
The first method that can be used to learn how to better manage finances and save money is the one devised by US Senator and Harvard teacher Elisabeth Warren, namely the 50/30/20. The numbers given are not random but represent percentages to be used to divide the monthly budget between needs, wants and savings.
To be more specific, those who decide to try this method should allocate:
- 50% of the monthly income to essential expenses, such as rent, mortgage, household expenses, food, transport costs and insurance;
- 30% to non-essential expenses related to small desires, such unnecessary purchases, may it be a dinner out, a movie night, holidays, etc.
- 20% to savings
The practical application of the method is not particularly complex, as all you have to do is divide the sum you have available into the three percentages above, set aside 20% and divide all your expenses between the two categories. For example, if we consider a monthly salary of £1 ,700, £ 850 could be allocated to essential expenses, £ 510 to non-essential expenses and the remaining £ 340 to savings.
Of course, the percentages can be readjusted according to the expenses that cannot be cut off and the amount of your income.
The 1% rule
The 1% rule has been devised by the Australian financial guru Glenn James. This rule, also called the 24-hour rule, is very simple to apply and helps to avoid impulse buying.
In this case, you need to take your annual income as a reference point; you then need to calculate how much 1% is.
To follow the rule, it is necessary, before making a non-essential expenditure whose amount exceeds this 1%, to take 24 hours to think about it. In this way, according to James, one will be able to avoid compulsive shopping and be able to set aside larger sums at the end of the month.
Zero-based budgeting is a savings system applied in the corporate sphere, which can also be applied to personal finances.
Specifically, the strategy requires planning in advance every expenditure to be made over the month, so as to be able to evenly divide up all the budget and to identify a sum, large or small, to allocate to savings.