Most effective strategies for saving money

6 February 2020

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Saving money can help to significantly simplify your life. Savings give you financial freedom in unexpected situations, and regularly adding to your savings can help you take a more responsible approach to your finances. Having a bit extra in your account and watching it grow over time is certainly a better feeling than going into the red every month. We lookat the most effective saving methods to help you achieve financial independence.

Strict budgeting method

This method is the most basic and you really should try it before any others. It is based on strictly monitoring expenses with respect to income.

Try carefully recording all expenses in individual categories that you define for one month (groceries, clothing, housing, socialising, car, etc.). You can use your smartphone and apps to help you track your expenses and save money - read our useful article about how apps can help you save money.

How you've spent your money is visualised at the end of the month, and this should mean that you'll be better prepared to budget going forwards and you should see other opportunities for greater savings.

Piggy bank method

If you ever put your spare coins into a piggy bank as a child, then now is the time to revisit the habit as an adult, especially if you find it inconvenient to set larger amounts aside on a regular basis. With smaller amounts, you are less aware of the amount you are saving every month.

The piggy bank method can even be used if you tend to use cards for payment rather than cash. If your bank has its own app, check and see if they offer micro savings. In some cases, you can round your card payments up and the difference is sent to your savings account, while others enable you to send a specific percentage of each card payment to your savings.


The 'paying yourself first' method

This method is essentially based on setting money aside for savings the minute your salary is paid. Many people often wait until the end of the month to see if they have any money left to put into their savings account.

Turning this habit around has a tremendous psychological effect. When you set a portion of this money aside immediately and pay all your other bills, the amount of money left over will be lower but you'll also tend to be less wasteful (all of us know that feeling of being a bit rich the moment we get paid!). The amount you transfer immediately to your savings account doesn't have to be excessive, so find an amount that is realistic for you that you can afford.


Snowball method

If you have a number of debts, try paying them off more quickly using the snowball method. The primary concept here is to repay the smaller debts as quickly as possible to enable you to focus on the larger amounts.

This saving method is called the snowball method because of the gradual way you repay all your loans until you are debt free.

You have to be very thorough to correctly use this method. Any time you pay off one debt, you then divert those funds dedicated to its repayment to accelerate the repayment of the next loan you have.


10% or 50/20/30 rule

The least you should do is master a basic principle of saving: 10% of your net income should ideally be set aside or invested. If you are interested in a slightly more complicated formula, you may be interested in the 50/20/30 rule, which also contains percentages of your income.

  • 50% should be dedicated to necessities including your housing, food, utilities, clothing, commuting expenses, fuel, etc., 
  • 20% should be invested
  • 30% should be for hobbies, leisure time and other things that make you happy.


A month without expenses

The name of this method can be a bit misleading, but we can explain. Of course, no one is asking you not to pay your water, electricity, or eat for a month.

A month without expenses commits you to not spend on anything EXCEPT your bare necessities such as housing and food. Basically, you won't be buying ice cream, you won't be going to cinema, you won't go out for a beer and you won't buy another pair of shoes for a whole month. This may be a major commitment for some, while simply a standard month for others.


Envelope method

The envelope method is the crème de la crème of savings rules. Basically, you commit to thoroughly planning out your budget and creating physical envelopes for individual categories of expenses. You put a specific amount of cash into each envelope at the beginning of the month and you do not spend any more that the fixed amount. No overdrafts.

Envelope categories include everything from groceries, petrol, clothing, household, leisure time or pocket money and it's up to you to set the budget for the individual envelopes.

The advantage of this method is that you actually see how much money is left over in each category and you'll be much less susceptible to spontaneous or reckless purchases. You can move money between envelopes but adding additional funds or cheating with card payments are both prohibited. You then transfer everything that's left over at the end of the month to your savings account.


Voluntary frugality

Of course, there are many other ways to save and we believe that you'll find the one that works best for you. Some may find it easier to only pay with cash and to use a shrinking pile of money as motivation to limit their spending. Others may take their own lunch to work instead of buying it or eating out in restaurants.

All these methods have something in common: to cultivate a sense of voluntary frugality. It is easy to succumb to the fact that everything is available all of the time and the fact that we can basically own anything immediately. However, we really don't need everything we want and when we stop shopping, it makes a difference to your wallet and to the planet.


Why is saving so good?

There are a number of sensible arguments as to why it is good to have extra money set aside and to regularly take care of our savings. Here are a few of them:

  • A better pension - While it is impossible to predict the future, economists are now warning that relying on the government-funded first pension system pillar may not be the best idea. A good example can be taken from the Netherlands which has the best pension system in the world. Their system is based on three pillars - a government pillar (a social insurance pension), a corporate pillar (pensions from employer-funded pension management companies) and a private pillar (everyone saving for themselves). The average pension in the Netherlands is almost EUR 1,900, while the pension from the first pillar is 'only' EUR 700. 
  • Funds to cover unexpected expenses - If your washing machine breaks down or if you are made redundant, it's always better (and financially more advantageous) to dip into your savings rather than take out a loan. 
  • Buying property - 100% mortgages are now exceedingly rare. You could use consumer credit to cover the remaining 10 to 30% of the purchase price of a property, but isn't it better to save ahead than to pay two loans with interest at the same time? 
  • Quicker loan repayment - If you already have loans, the money you save can be used to repay them quicker and then to save on interest charges. 
  • Financial literacy - A high level of financial literacy equals a low chance of being at risk of poverty. If you are able to manage money properly, there is a high likelihood that you won't find yourself subject to bankruptcy proceedings or any other financial difficulties in your life, which are often related to indiscriminate borrowing and unbearable loans. Saving regularly is one of the ways to master financial literacy and to successfully avoid unnecessary loans.


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