Features & Sacco Leadership

How to apply the golden rule of saving money

How to apply the golden rule of saving money

Saving money is a crucial part of building financial security, and one of the most effective strategies for saving consistently is following the golden rule of saving money: Pay Yourself First. This rule is simple but powerful: before you spend on anything else, set aside a portion of your income for savings. This ensures that saving is a priority and becomes a regular habit.

How to Apply the Golden Rule of Saving Money

  1. Establish a Savings Goal

Before you begin applying the golden rule of saving, it’s essential to have clear financial goals in mind. Your savings goals can vary, depending on your personal situation, but here are some common objectives:

  • Experts recommend setting aside 3-6 months of living expenses to cover unexpected emergencies like medical bills, job loss, or urgent repairs.
  • Long-term savings for retirement ensures that you will have enough money to maintain your lifestyle when you stop working.
  • Whether you’re saving for a home, a car, or an education, setting a goal for a major purchase is a smart financial move.
  • Putting money aside for investing allows your savings to grow through assets like stocks, real estate, or bonds.

Once you’ve established a goal, you can work out how much you need to save each month to reach it.

  1. Set a Savings Percentage

A key aspect of paying yourself first is determining how much of your income you want to save. Financial experts commonly recommend setting aside at least 20% of your income, but the percentage may vary based on your financial situation and goals. Here’s how you can approach it:

  • If 20% seems like too much, start with a smaller amount like 5% or 10%. The important thing is to create the habit of saving regularly.
  • As you become more comfortable with saving, you can increase the percentage over time. For example, if you receive a raise or pay off a debt, direct that extra income into your savings.
  • If you’re saving for a specific goal with a fixed timeline (like a house down payment), calculate how much you need to save each month to meet that deadline.
  1. Automate Your Savings

One of the most effective ways to ensure that you consistently pay yourself first is by automating the process. Here’s how automation can help:

  • Set up an automatic transfer from your checking account to your savings account as soon as you receive your paycheck. This ensures that your savings are allocated before you have a chance to spend the money.
  • If your employer offers a retirement plan, such as a 401(k), consider automating contributions to ensure a portion of your income goes directly into your retirement account.
  • There are various savings apps that allow you to set savings goals and automatically transfer small amounts of money into your savings account regularly.

By automating your savings, you eliminate the temptation to spend that money, making it easier to stick to your financial plan.

  1. Adjust Your Budget to Fit the Rule

When you apply the golden rule of saving, you are left with a smaller amount of money for your daily expenses. This requires you to budget effectively and ensure that your essential needs are met. Here are steps to adjust your budget:

  • Begin by tracking your expenses over a month to see where your money is going. This will give you a clear picture of where you can cut back.
  • Your budget should first cover necessities like housing, utilities, groceries, and transportation. After those are covered, any leftover money can go toward discretionary spending.
  • Look for areas where you can reduce expenses. For example, cancel subscriptions you no longer use, reduce dining out, or cut back on non-essential purchases.
  • The golden rule works best when you consistently live below your means. By keeping your lifestyle in check, you’ll have more room to save and invest for the future.
  1. Build an Emergency Fund

One of the first financial goals when applying the golden rule is to establish an emergency fund. This fund will help protect you from unexpected financial setbacks, allowing you to avoid dipping into your savings for emergencies. Here’s how to build your emergency fund:

  • Aim to save enough to cover 3-6 months of essential living expenses, including rent/mortgage, utilities, food, and transportation.
  • If saving that much seems overwhelming, start by setting aside a smaller amount each month until you reach your goal. For example, aim to save Sh20,000 each month until you accumulate Sh120,000.
  • Store your emergency fund in a savings account that is easily accessible but not too easy to withdraw from (so you aren’t tempted to use it for non-emergencies).
  1. Grow Your Savings with Investments

Once you’ve established a steady savings routine and built an emergency fund, you can explore ways to grow your wealth through investments. Investing allows your money to work for you by generating returns over time. Here are a few ways to invest:

  • Investing in individual stocks or exchange-traded funds (ETFs) can provide higher returns over the long term.
  • Buying property as an investment can provide income through rent and long-term appreciation.
  • Contributing to tax-advantaged retirement accounts like a 401(k) or an IRA allows your savings to grow while enjoying tax benefits.

The earlier you start investing, the more time your money has to grow through compound interest.

  1. Stay Consistent and Review Progress

Consistency is key to successfully applying the golden rule of saving. Stick to your savings plan every month and review your progress regularly. Here’s how you can stay on track:

  • Monitor your savings accounts and investments to see how your wealth is growing. This will keep you motivated to continue saving.
  • Life circumstances change, and so should your savings plan. If your income increases, aim to save a higher percentage. If you experience a financial setback, adjust your savings rate temporarily, but don’t stop saving altogether.
  • Reaching savings goals can be a rewarding experience. Celebrate your milestones and reflect on how far you’ve come in building financial stability.

 

Andrew Walyaula
Author: Andrew Walyaula

Andrew Walyaula is a seasoned multimedia journalist. waliaulaandrew0@gmail.com

Andrew Walyaula

About Author

Andrew Walyaula is a seasoned multimedia journalist. waliaulaandrew0@gmail.com

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