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Step 1
Identify Your Own Saving Potentials

How to Save Money

Saving money requires discipline and planning, but there are several strategies you can use to help you reach your financial goals. In order to find out how much money you can save, you first need to obtain an overview of your income and expenses. Even if this first step appears simple, it might be very annoying: once on a rainy day, grab your bank statements for the last 12 months and write down for each category how much money is coming in and going out. Then, challenge yourself if you are a smart consumer and try to reduce spending whenever possible. Here are some tips to get you started:
 

  • Create a budget: Knowing how much money you have coming in and going out is key to saving money. Consider tracking your spending for a month to get a better understanding of where your money is going, and then create a budget that allocates funds for your expenses, debt repayment, and savings. Some banking apps like Revolut offer budgeting or spending rules fully automated and might help saving money in a highly convenient way.

    A helpful budget rule for saving money is the 50/20/30 rule of thumb. Applying this rule means you may spend max. 50% of your income on important needs like rent or mortgage, 30% on nice-to-have things like going out or travelling, and 20% on savings for retirement or a globally diversified portfolio based on low-cost ETFs
     

  • Reduce your expenses: Once you have a clear understanding of your spending habits, look for ways to cut back. You may be able to reduce your monthly bills by negotiating with service providers, or by cutting out subscriptions or memberships you no longer use or need.
     

  • Automate your savings: One of the easiest ways to save money is to set up automatic transfers from your checking account to a savings account each month. This way, you won't have to think about it and you'll be less likely to spend the money. Some banking apps like Revolut offer fully automated vaults for saving money in a highly convenient way - for free.

  • ​Take advantage of sales and discounts: Take advantage of sales and discounts to buy items you need at a lower cost. This can also help you avoid impulse purchases. There are smartphone apps available for free which help to analyse your spending and afterwards recommend options for lowering your costs, e.g., by switching subscription providers.
     

  • Avoid debt: If possible, avoid taking on new debt and focus on paying off any debt you already have. High-interest debt, such as credit card debt, can be particularly harmful to your finances.
     

  • Start small: Saving even a little bit each month can help you build the habit of saving. As you get used to saving, you can gradually increase the amount you put away each month.
     

  • Set savings goals: Having a specific savings goal in mind can help you stay motivated and focused on your financial goals. Vaults as they are offered by Revolut for free might be a great and easy to set-up method for setting saving goals.

Income

Regular

  • Salary​

  • Rent

Irregular

  • Freelance work​

  • Secondary employment

  • Dividends

  • Interests

     

Expenses

Regular

  • Subscriptions (e.g., like rent, mobile, internet, TV, gym)

  • Utilities (electricity, gas, water)

  • Insurance (health, car, house, etc.)

Other

  • Food

  • Clothing

  • Personal Care

  • Education

  • Entertainment

  • Transportation

  • Donations / Gifts

  • Recreation

Reduction Potentials

  • Smart Consumer = learning how to get the most for your money

  • Reduce unnecessary spending (kill subscriptions or re-negotiate)

  • Keep recording expenses to keep an overview & budget

  • Run regular budget reviews

Saving Rate per Month

Source: Smart Money Diary - December 2022

Smart Tools for Tracking Your Expenses

Set-up a simple table in MS Excel or Google Sheets as shown below and fill in the data you have gathered manually. Then deduct expenses per month from the income and the result shows what you could save. Running this exercise for the first time will be eye-opening, for sure.

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For those who prefer to track and monitor expenses automatically and to identify saving potentials on their smartphone, there are free smartphone apps for money management and budgeting available. One is moneyhub - finalist of 2021 British Bank Awards for Best Personal Finance App - and the other is called snoop, winner of the 2021 British Bank Awards for innovations.

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Since not every month will show the same saving amount, there are two options to determine your personal saving rate:

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  1. Either transfer every month manually what is left into your brokerage account or

  2. Sum up the saving amounts per month for the whole year and divide by 12 to reach an average saving amount you can sustain.

Cash Reserve for Extraordinary Expenses

But before putting this money to work, make sure to have a cash reserve of 3-6 monthly salaries for extraordinary expenses (e.g., replacement of broken washing machine). Freelancers might want to increase the buffer - depending on their individual cashflow situation. Even the cash reserve you can "invest" with the necessary liquidity to earn some interests. Meanwhile, there are banks offering a decent interest rate for overnight money and you don't have to keep huge amounts in your savings account.

Keep It Simple!

One last thing: Try to keep it as simple as possible - only then it will be user-friendly and helpful for regular updates and better cost control. For those who want to track and monitor expenses in the most convenient way, maybe consider one of the two smartphone apps mentioned above. They also might help to keep discipline with regards to saving money.

Free Spreadsheet to Download for Tracking Your Personal Cashflow

Click on picture to download free cashflow tracking sheet in ODS-format:
Bildschirm­foto 2022-12-17 um 11.45.58.png

Source: Smart Money Diary - December 2022

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