Do you find it difficult to save?
If yes, you’re not alone. The latest survey of the BSP indicate that less than 25% of the Philippine population has any savings at all, even for emergency purposes. Limited income and poor spending habits both factor in, but the rest of the survey reveals something more: a staggering 40% of those who save just keep their savings at home, instead of putting it anywhere that nets interest. Which leaves the financial future of many in serious doubt.
Given that it isn’t easy to save, how do you make it work? Aren’t there ways to help you keep what you earn and make it stay longer with you?
1. Define your goal
All financial experts agree that for savings to get anywhere, you must set a target. This goal provides direction and milestones that will show you that you’re making progress.
I recommend the following financial milestones, in this order:
• 6 months worth of emergency savings. In the event you’re unable to work, this may help you keep a comfortable lifestyle long enough to get back on your feet.
• Health and Life Insurance. Famous journalist Roger Ebert once said, before he died of cancer, that “nothing cures wealth like illness.” You are your own greatest asset, so it stands to reason you should protect yourself first, ahead of your own car or house.
• Medium-to-long term savings. This is for retirement and pension. Your later days may mean less work on your part and thus less income. Your savings now determine your quality of life later on.
Also read: How to get your finances on track...before retiring
2. Understand compound interest
This is best illustrated by an example: a can of soft drink may cost an average of P25. If you didn’t buy that can and instead placed P25 in a UITF or mutual fund with 10% interest, after 20 years you would have P168.
That’s a tiny amount of money, you might think—BUT consider that a regular person will actually buy soft drinks or similar products several times a week. If you bought a can every other day, you may end up buying 4 times a week, or 16 times a month. Now take that amount (P400 a month) and imagine paying that monthly to the same fund for the next 20 years. If you do, you would end up with P274,920!
That’s the power of compound interest: your money builds interest on the interest of the years that came before it. Every peso you set aside will work very hard, even while you sleep, to grow and give you a good return.
Of course, it works both ways. If you DON’T save the P400 a month and spend it on frivolous things, you actually take away its future value to you. This is called opportunity cost, and the cost of not saving your P400 a month at 10% interest is P274,920, in 20 years’ time.
Also read: How to find the right investment
3. Set aside savings ASAP
Get your monthly income from all sources. Then tabulate all your regular monthly expenses and subtract them from your income. Then the crucial part: make savings a priority expense on your budget. That means you put away cash for savings ahead of everything else. This means that once you get your salary you immediately set aside the money as soon as you get it. Make this your rule: at least 10-20% of your income goes into savings. You can do more if you like.
If your cashflow cannot accommodate savings and you can't pare down your expenses to help it, then you will need to find ways to increase your income. Thankfully, modern times has made it easier to find means of augmenting your cashflow. One may takes sales as a sideline, or market their skills on freelance sites, or open up an SME (Small-to-medium enterprise). It depends on what your skills are.
However, just because you have more money, doesn’t mean you’ll save more. Usually the opposite is true: you’ll spend more. The mind wants what it wants when it wants it, and usually it wants immediate gratification. Again, you must train yourself to make savings a priority if you don't want your new income to go up in smoke.
4. Let savings grow as income grows
Don't keep it a steady amount but a percentage of your income—10 to 20% of what you earn. This is doable even if your income is irregular, as is the case with commissions. Whatever income stream you use, abide by this rule. Set aside the right amount according to what you earn.
Also read: Getting past bad money habits
5. Keep your savings out of easy reach
The closer your money is to your wallet, the sooner you will spend it. If the bulk of your savings is in the ATM, you don't have to wonder why your account reaches zero whenever you're hungry or feeling the need for new clothes. Out of sight, out of mind; keep your emergency savings in a time deposit or a fund that isn’t easy to withdraw from.
6. Automate your savings
One of the best ways to ensure savings is to take willpower out of the equation—by using a system where money is automatically debited from your account and placed in savings. If your company offers retirement plans, then they’re doing this for you, pre-taxed. But even if you’re not among the lucky few with this system, don’t despair. You can set up your own where money is automatically debited from your account and stashed away for you. Banks and some financial institutions offer such a service.
Savings are a wonderful thing to have. There’s nothing like the feeling of being in control of your finances. Having new computers, cellphones, cars, and clothes may make you happy to you have them at first, your satisfaction diminishes over time. But as your savings grow over the years, your satisfaction with it will keep growing as well. Just stick to your rules and you’ll do well.