Banking for Beginners – Start with a Savings Account
Did you ever wonder about the secret to financial health? Why is it that some people seem to worry about money all the time and others seem to have control over their lives? The answer is not complicated. It comes down to two simple actions: spend less than you earn and save what you don’t need to spend. You may think that is an over-simplification, but it is the truth for all people, whether they earn a lot of money of not.
Many young people think the rite of passage into adulthood is a first credit card, but a far more valuable asset is a savings account. Managing your money and starting on the path to financial freedom is a very simple process. Unfortunately, the process is rarely taught and many people have to learn their lessons the hard way. Here are the steps to follow:
- Using a pencil and paper or a computer spreadsheet, whichever is the most comfortable for you, list all of your income for the month. Make sure you use your take-home pay, and not your gross pay.
- List all of the things you must pay for each month. Start with the bills that are always the same, such as rent or car payments. These are called “fixed” expenses.
- Next list all of the things you have to buy each month. This includes food, utilities, phone bill, transportation expenses, clothing, medical needs and any other expense you have to pay. Don’t leave things out like grooming and clothes. These are things you need.
- Take one tenth of your income and list it as “savings”. Treat this item as an obligation, because it is the most important step in this process.
- Double any payment you currently make against credit card debt to pay it off.
- Give yourself some money for entertainment. Whether you are renting a movie for a dollar or going out on the town, this is money you will spend, so plan for it and don’t spend more than you define for yourself as a reasonable monthly expense.
- Add up all of your expenses and subtract the total from your income.
Is there any money left? If there is, great! If not, you will need to either figure out a way to make more money or to spend less. Go back to the list of things you need to spend and see if there is anything on the list that is a “want” instead of a “need”. Eliminate the “wants” until you can balance the budget.
The savings account you have set up to hold your savings is your emergency fund. Do not touch it. You want that balance to grow to at least six times the amount of your monthly income. As you earn more money, be sure to increase the savings element of your budget to match. When you have money left over at the end of the monthly cycle, you can open a second savings account for the expensive “wants” in your life. Set goals to save for the things you want, such as “I want to go to Europe in three years.” Don’t be afraid to reach for the stars! Striving for things that seem out of your reach is vital to financial success. Save money wherever and however you can. Put that money in the bank and be proud of what you have saved.
An important aspect of your savings success is selecting an account that does not drain your precious funds with fees. You may find that online banking is a very convenient way to make sure that as you pay your bills, you also pay your savings.
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