Savings: Easy As Pie! Basic Savings Strategy
Guest contributor, Alexandra from Real Simple Finances.
Basic Savings Strategy-Perfect Approach to Build Long-Term Wealth
There are few things I enjoy in this world more than pie. Aside from being really delicious, pie also serves as a great guideline when designing savings plans. After all, who doesn’t want a big piece of financial pie?
My favorite pie is apple, whereas my husband prefers pumpkin. Just as our tastes differ, so might your financial pie differ from the examples I have shown here. These pie charts are meant to be guidelines and hints, but are no substitute for professional financial advice.
By creating an income, expenses, savings pie you gain an understanding of where your money is going. Only then can you figure out whether you’re on track to meet you financial life goals.
First, know your pie. You must understand your income and expenses pie to become a saver. Let pie be your basic savings strategy guide.
Read more: The Saving Secret Worth $366,000>>>
1. The Pie Categories-Basic Saving Strategies
Basic savings strategy, targeted and implemented systematically will change your life. By learning how to look at saving, reinforcing strong money habits, and saving consistently, your life will be better.
Think about it, money worries are among the top stressors in life. If you can cut those financial pressures back with a basic savings strategy then you’re on the road to greater wealth in life. And we’re not talking about just financial wealth, but life satisfactions and fulfillment as well.
Understand the types of spending:
The first, and probably largest, piece of your pie is taken up by essential expenses, such as cost of living (read: food and shelter), transportation, and expenses that are necessary to continue your employment. If you live somewhere expensive, such as NYC, then your essential pie is going to be larger than if you live in St. Louis.
Things that are not essential include cable, your daily latte, and magazine subscriptions. Don’t worry – those fall into your discretionary spending category. This is the category that holds all the expenses for fun and lifestyle enhancement situations.
Watch out, some of you may consider certain discretionary expenses essential.
Finally, you need to save a piece of your pie to, well, save! This portion of your pie will focus on your savings accounts – any accounts you might have, such as an emergency fund, retirement funds, and education funds for yourself or your dependents.
You can get fancy with the savings part of your pie and divide into smaller savings categories such as emergency, college fund, down payment, vacation, retirement etc.
I also propose an optional fourth piece of the pie for those looking to eliminate debt: the extra payment slice. I will talk about how this fits into the pie as a whole in one of my examples below.
2. Where Are You Now? On the Road to a Solid Saving Strategy
You cannot move forward without assessing your current situation. While I do not think it’s necessary to create a budget, you do need to see where you stand as far as your finances are concerned.
Tally up how much money you spend in the first three areas of your pie – your essential expenses, discretionary spending and saving categories – Then, divide your total in each category by your total take-home (post-taxes) paycheck.
For example: If your take home pay is $2,500 each month (roughly $30,000 per year), and you spend $1,150 on your essential expenses, then:
46% goes to essential expenses (1150 / 2500 = 0.46 = 46%).
If you allocate $500 each month to savings accounts, you are aportioning 20% for savings (500 / 2500 = 0.2).
Finally, it looks like you’re spending a whopping $850 on your discretionary spending category. Thus, 34% goes to discretionary spending (2500 x .34 = 850).
Of course, you should never have a pie that is made up of over 100%.
If you do, that’s bad – it means you are overspending, and need to reevaluate your finances.
If you have credit card debt which isn’t paid off at the end of the month, your spending is surpassing your income. That’s when you need to make a life decision about your financial future.
Do you want to be in debt or do you want financial security?
3. Envision Your Dream Pie
Getting your pie together will help you stay in control when your financial life isn’t going the way you wanted it to. Having a structure that keeps you accountable will help you rise up to meet emergencies and unexpected situations when need be.
Your dream pie, no matter what flavor it is, should include an essential expenses budget of no more than 50 percent according to Laura Shin at LearnVest . Included in the essentials budget is a maximum of 30 percent to housing, leaving an additional 20 percent for other essentials like your car, insurance, and perhaps heating oil (a brutal reality for some of us!). If you are in debt and have payments – student loans, car payments, etcetera – then you may need to allocate up to 60 percent of your budget for this category, depending on how much money you owe.
The essential expenses category is pretty straight forward; the others can borrow from each other as need be. You will see how quickly things can become complicated – but hold on!
Next, you should aim to save at least 10% of your income. This is the absolute minimum. Preferably, your savings will be higher – from 20 to even 30 percent. As long as you have an emergency fund with at least 6 months of expenses in it, you can decrease the amount of saving while you pay off debt.
If you are highly in debt, allocating an additional 10-20 percent of your income to extra payments is beneficial.
Finally, whatever is left is discretionary, yours to be spent how you like. This might make for some excellent motivation to pay off debt – when your student loans are paid off, you can spend more money on fun things!
Let’s see a few of these pies in practice.
Example 1: Lilly, the student. 60/20/20 method.
Income: $1,500 per month (roughly $18,000/year) post taxes
Student loans: $300
Total: $900, or 60% of her take-home pay.
Emergency fund: $100
Vacation fund: $50
Total: $300, or 20%
This leaves Lilly with $300, or 20 percent, of her take-home pay per month for fun spending. Lilly could also decrease her unnecessary spending to $150, adding the other $150 to her student loan payment, creating a 10 percent debt payoff slice in her pie.
Example 2: Mark, who lives at home.
After taxes, Mark takes home $3,500 per month (roughly $42,000 per year). He lives with his parents, but is saving to buy his own home soon.
Car payment and insurance: $500
Total: $1,000, or 28%
Emergency fund: $300
Savings account for a house down payment: $500
Total: $1,100, or 31%
Mark has only used up 59 percent of his income, making his situation quite enviable. Mark is definitely in a good situation to purchase a home, provided he watches what additional costs will be involved.
Spend a few minutes now crafting your income, expenses, savings-ideal pie and your future self will thank you.Learn wealth building basics in a few hours here.
- Create your current Income-Expenses-Savings Pie
- Create your ideal Income-Expenses-Savings Pie
- Review-Adjust the categories to align with your true priorities. Are you saving enough to meet your future goals?
What does your income and expenses pie look like?
Alexandra is the owner of Real Simple Finances, where she writes easy finance tips for real people. In addition to fighting off student loan debt, Alexandra is a university English Instructor.