Updated: Apr 13, 2019
Hello Money Talkers! I know you are all dying to know what the second step to financial freedom is… and I am about to spill the beans. The second step to financial freedom is SAVING. I know, sounds super cliche… but how can you build wealth without saving money? You can’t.
So… saving… let’s just dive right in. In order to save, you must widen the gap. What is this “gap” I speak of? The gap refers to the gap between what you earn and what you spend. The wider the gap, the more money you have. Many financial experts say that the gap is the key to wealth. There are only two ways to widen the gap, spend less and earn more.
Spending less is so obvious. Money 101: Spend less than you earn. It seems like common sense. But many budgets are upside down and their monthly cash flows are in the negative. Last blog post we went over budgeting. If you did not read it, you might want to do that now. Here is the link to the budgeting blog post if you want to revisit it. https://www.themoneytalk.net/post/blog-3-first-step-to-financial-freedom-budgeting Budgeting is a prerequisite to saving. So to begin saving you must have your budget done.
Just as a reminder when you do your budget ANYTHING and EVERYTHING you spend money on monthly needs to be accounted for ACCURATELY in your budget. Check your bank statements to see your actual spending habits. You can also use free budgeting apps such as Mint, Personal Capital, Tiller, You Need A Budget, and CountAbout (just to name a few), to monitor your actual spending. These apps collect data from all of your accounts to show your entire financial picture in one glance.
Side note: I am a bartender, so I mostly deal with cash. The apps I just mentioned do not account for cash transactions, only what’s going on in your accounts. Unfortunately, the only way I have been able to keep up with my cash transactions is manually. I use the “spending” app, it looks like a wallet. This app allows me to write down everything I make and everything I spend in cash. I like this because it functions as a food journal, but with money. If you have to write down what you spend as you are spending it, you are more likely to make better spending choices. Or you can just deposit everything into the bank and strictly use your cards, this way you can track your income and spending more accurately because you can see it in your bank statement.
If your budget is negative you are at a deficit, if it's positive then you are at a surplus.
Either way, deficit or surplus, you need to:
Differentiate your wants from your needs and eliminate the wants you can part with. For example, do you need to get your nails done every week, do you need to get your car washed every week, do you need to eat out every night? No.
Cut your costs (this may take discipline, but we got this!). Go through your expenses, line by line, and see how you can cut back on them. I know... this sounds crazy. These costs seem fixed, but they might not be. For example, you can spend less on gas by carpooling, you can shop around for a better cell phone plan or a better car insurance quote, you can even spend less on groceries or utilities. Every little bit helps. If you cannot seem to part with a particular expense, at least cutback. So instead of getting your nails done every other week, one time go to the salon, the next time paint them yourself or have a girlfriend do them for you. Just be creative in how you save.
Stick to your budget! Making a budget means nothing if you do not use your money how you planned on using it. Consistency is key. This is literally THE hardest part. Many people start diets… but do they see results in the long term? No. Because they lack consistency and determination. Similarly, most people are not rich because they are not disciplined enough to build wealth. Discipline yourself, be consistent, see results.
If you follow these three simple steps you can make your surplus (gap) even larger. The more monthly cash flow you have, the more wealth you can build.
Now that we have covered how to spend less, let’s go over how to earn more. If you have cut and cut back on every expense possible in your budget and your monthly cash flow is still negative, or your not at as big of a surplus as you want it to be (let’s be honest… there’s no such thing as too much surplus of money) then the only other way to widen the gap is to earn more. However, this is easier said than done.
It is by far way more difficult to grow your income than it is to cut spending. This is because earning more requires more time and more effort. However, there are several ways to make more money:
Negotiating for a raise at work. I know… sounds like it’s never going to happen, but you will never know unless you try. If you have been at the same company for years and have taken on more responsibility… you are DUE for a raise. So do not be afraid to ask for what is rightfully yours. Even if you have been with a company for years and not been given additional responsibilities, you should be given a raise every couple of years just to keep up with inflation. So what is the hurt in asking? The worst they can say is no.
Changing jobs and seeking a higher-paid position (and negotiating your starting salary at the new company). This sounds super scary… and it is. You would be leaving a job that you are super comfortable with and loyal to for a new job. It feels equivalent to divorcing your spouse who just isn’t “doing it” for you anymore and marrying a younger hotter partner. But switching jobs is not that dirty. You should not think of it as divorcing and remarrying out of your league; you should think of it as dating a loser and breaking up with that loser then finding someone who treats your right. :) Tangent time! So recently… like super recently, her first day was last week, my best friend started a new job. She was with her old company for 24 years, her salary eventually reached $55,000 and then they cut her salary $10,000 a year. She felt spread thin as she took on more responsibility when they cut her supporting staff. So not only, after working 24 years for a company was she doing more, but she was making significantly less. She felt as though it was time for a change, and coincidentally a friend told her about a job opportunity that she thought she would be perfect for. Now, when my bestie told me about this opportunity she was a little petrified and wasn’t sure if she should pursue it. But I reassured her what she already knew… she was worth more than what her old job was providing for her. So I gave her the same advice as I would have given any woman with a deadbeat boyfriend, leave him and find a better one! And that is exactly what she did. Now she makes more and does less.
Get a side hustle. Some examples of side hustles are selling household items you no longer need, selling things you make, washing cars, mowing lawns, reading palms, writing a blog, photography etc. Basically, anything you do outside of your normal 9-5 that can earn you money is a side hustle. Not only can this boost your earning power, but this can also bring you joy. I paint as a side hustle, and it's therapeutic for me, plus I make money off of each painting. My sister does photography in her spare time and makes such good money doing that, and it brings her so much joy, she is contemplating quitting her day job for it. The bottom line is, there are many side hustles you can pick up that will bring you joy and money. Any activities that produce income are considered side hustles. Some activities even start as side hustles and turn into businesses, so always be open to new opportunities because you never know what can come of them.
Now that you are saving adequately, you should fund an emergency fund. Emergency funds should be at least $1000 to start. After you have your $1000 starter emergency fund, you should begin fully funding it. Fully funded emergency funds are comprised of 3-6 months worth of expenses. Emergencies do happen. What if you lose your job, or a costly expense comes up (new tires, medical emergency, car troubles, ticket, home repairs, etc.)? Sh*t happens, and you should always be prepared for it, so it doesn’t set you back That’s what an emergency fund is for.
Now that you have optimized your budget, cut your spending as much as possible, and maximized your earnings, saving should come second nature. But where do you put your savings? Originally, I had my savings account at the same bank that my checking account was in, Regions. Most people do the same exact thing. Then I realized that my money could be making me more money. My interest rate was so low that I usually only got back a penny or two in interest. I decided to look into savings accounts with higher interest rates. After some research and shopping around, I eventually decided to open a high yield savings account at Marcus by Goldman Sachs, a very reputable bank, with an annual percentage yield (APY) of 2.25%. It doesn’t sound like a lot, but every month I get about $5 extra in interest, just for letting my money sit there. Plus, the more money I put away, the more interest and compound interest my savings will earn. You can pick any bank though. Just check out bankrate.com to compare rates and pick a bank that works best for you. Online banks are becoming super popular. This is because online banks have no brick and mortar locations so they do not have to pay overhead and they don't have to pay a lot of employees to run them, so they can offer higher interest rates because of that.
So long story short… create a budget, cut your expenses as much as possible, make as much as possible, stick to the guidelines you’ve created for yourself and save. It will not be easy. It can be very difficult at times, and it will require dedication, but you can do it! Once you do, you will be one step closer to financial freedom!