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Unleash your financial freedom: Important tips for saving money

Unleash your financial freedom: Important tips for saving money

An effective method to increase personal wealth is to spend less on expenses. The easiest way to spend less on expenses is to reduce the cost. It is not about how much you earn but about how much you save from what you earn. A simplified formula:

Savings = Earnings - Expenses.

There are people who do not believe in this because they find it hard to increase earnings. Therefore, they would do whatever it takes to advance in their career but ignore the managed cost of daily expenses. In the end, they will find they have not really earned much yet the scarcity of money. This leads to another simplified formula that describes these people.

Wealth = High Earnings - High Expenses

Just because an individual has high earnings does not mean that they are rich. Hence, they should be more concerned in increasing wealth. Earnings are sometimes an unexpected event, but expenses can be managed and determined. By reducing expenses, an individual can prevent money shortages and debts to increase wealth. 

Now on to comparing this book to other money saving tips and why other tips may not work as effectively. Many people take the approach to never spend on any unnecessary expenses with hopes of acquiring wealth from savings in the long run. This is akin to a crash diet where you would eat very little to lose weight. Although it may work short term, it is not sustainable because people become depressed from no entertainment or reward and go on a binge spending spree. 

This approach will not work to restrict people from spending on impulse. The better way is to increase awareness of the situation of how much one is spending and the possible ways to reduce the cost. This is like increasing knowledge of different foods and choosing a healthier eating option. Overall, managed cost is a way to avoid a mindset of "I can buy this because I have money" and change to "I can buy this if it is with good reason". 

I hope to tackle the issue of managed cost through various methods and examples in this book with the intention of enabling people to spend less and increase wealth without feeling a significant change in lifestyle.

Saving on Everyday Expenses

This section on reducing utility bills mainly discusses small behavior changes and relatively inexpensive home improvements. However, these changes, even if they seem small, can result in several hundred or even thousands of dollars saved each year. Once an individual has established a habit of these changes, they can usually be maintained with little further effort. The key is to do it.

Lastly, individuals can save a substantial amount of money by winterizing their homes. This is a simple do-it-yourself process which includes weather stripping windows and doors, sealing air leaks with caulking, adding more insulation, and covering the walls and windows with clear plastic to keep the heat in. 

The US Department of Energy predicts that these changes can reduce heating bills as much as 25%, or roughly $200 per year, with similar savings in areas that require air conditioning. These combined changes do not cost much time or money, and can save an average income household more than $600 annually.

Use low-flow fixtures, particularly in warm climates. According to the California Urban Water Conservation Council, this can decrease both water and energy bills by more than $50 per year. Only running the dishwasher with a full load can save you approximately $40 annually, and turning the thermostat down on your water heater another $40, according to the California Energy Commission.

Reducing Utility Bills

Hot water usage can cost a considerable amount of money. When running a bath, only use the amount of water that you need. Extra water is wasted along with the cost of heating it. When doing regular hand washing, simply fill up the sink to wash items, do not use a continually running tap. 

With regards to the kettle, fill it with the amount of water that is required at that time. Boiling a full kettle for one cup of tea is twice the cost. Try to take showers instead of baths, and when using the shower, try to spend as little time as possible in order to save water and heating costs.

Only use the washing machine or dishwasher with full load. Use the economy setting if available. This will use less electricity but realistically the resultant clean washing will be more beneficial. To do this with full loads, you are avoiding wasted water and electricity, and the inconvenience of color and material mixing and spoiling of the clothes. At present in 2006, the average cost of running an A-rated washing machine is approximately 15 pence per cycle. 

Therefore, the average family could save 60 pounds a year on washing alone. With the dishwasher, the most efficient way to save electricity and water is to wash-up from the day and only turn on the machine when it is completely full, using the economy or half load option. If you do not need to use a dishwasher, do them by hand and save even more.

Turn your heating thermostat down by 1 degree. The recommended temperature for the living room is 21 degrees C, and 18 degrees C for other occupied rooms. Reducing your room by as little as 1 degree can cut your heating bills by up to 10%.

Switch off any electrical items that are not being used, for example televisions, videos, Hi-Fis, computers etc. Each of these machines still use electricity whilst on standby mode, to some degree or another. 

By turning them off at the mains you are reducing their energy usage and therefore saving money. You are not only saving money, but you are also contributing to a lesser demand on power station usage and therefore helping to prevent the depletion of natural resources, and reducing the side effects of pollution.

Cutting Grocery Costs

Value brands can generally be half the price of the bigger brand names for an almost identical product. It really is worth giving them a try and sticking with any you're satisfied with. Buy food in its raw form and prepare meals from scratch. This will usually cost a fraction of the price of a pre-cooked or pre-packaged meal. 

It's also a lot healthier. And prepare meals in bulk, portion them, and freeze anything that might not get eaten straight away. This ensures no food is wasted and can provide quick and convenient meals on the days you don't have the time nor the inclination to cook.

Remember to eat a balanced meal before you go shopping. It will help you make reasoned decisions about what you buy and act as a deterrent to the 'buying the best' rule - which can cost a small fortune. Stick to a list whenever you shop (which should be once a week), and avoid picking up anything else other than the items listed. 

Impulsive buys can easily add 30% to your bill. Allocate a set amount of money to spend on groceries each week. When the money is gone, it's gone. Not only will this approach control your spending, but it will prioritize what you need food-wise and make you reconsider how money is best spent. An added bonus could be money left over to treat yourself at the end of the week.

Minimizing Transportation Expenses

Accumulated over the course of a long period, transportation costs can amount to a significant sum. However, there are a few easy methods to keep these costs low. Implementing a no-driving day once every week will reduce wear and tear on your vehicle as well as save gasoline. For trips to work or shopping that are too far to walk or bike, make an effort to join a carpool or use public transportation. 

Whether you are traveling across town or across the country, good planning can eliminate or reduce the need to eat out. Prepare your own food in advance and take it with you. Finally, minimize flying. Though this may be difficult, given people's frequent and varied reasons for travel, the fact remains that flying is one of the most expensive ways to get from one place to another. 

If there is a viable alternative means of transportation, it is likely to be cheaper. By far the most expensive (and least efficient) alternative will be to rely on cabs and airport shuttles at both ends of the flight. Consider luggage and parking as hidden costs, and the great deal of time commonly spent in airports, and it becomes clear that flying is not a very economical choice.

Financial Planning and Budgeting

Another factor in goal setting is the effect of energy and resources as well as the prioritization of goals. It is invaluable to decipher if a goal is worth the allocation of resources. If the priority of the goal is lesser than other considerations, it may receive insufficient allocation and should be reevaluated. 

This does not mean abandoning low priority goals, but possibly adjusting the time frame. With this in mind, it will now be possible to plan the next steps of your financial future, with a destination in mind.

An example of a long term goal might be retiring at 65 years old with a personal net worth of $1,000,000. This would require an individual or family to determine what would be considered an appropriate net worth in 2031. This can be done using an expected average rate of return and solving for the present value of $1,000,000. Next, a comparison can be done between the expected net worth and estimated future assets and liabilities. 

This will provide a guideline for net worth to be on pace with accumulation of assets and minimization of debt. A plan can then be constructed to achieve and maintain this net worth. An important aspect of this goal setting will be a realistic time frame.

Long term goals usually take greater than 5 years to achieve. As we go through the different steps in the financial planning process, the focus today in the setting financial goals should be on the long term goals.

Once you have identified your financial goals, prioritizing them is critical. This will provide valuable insight into your ideal short term, medium term, and long term goals. It will also be the deciding factor in your plans; if the goals are unrealistic, some adjusting will be in order.

Setting Financial Goals

Setting financial goals means having a long-term plan for what you want to do with your money. If you have a clear goal, it is easier to make decisions about using your money. Your goals will vary depending on your stage of life and past experiences. The main point is to have goals that are specific and measurable rather than vague ones. 

For example, "I want to have enough money to live on when I am too old to work" is a very general statement. A more specific and measurable goal would be "I want to have an annual income of $30,000 (in today's dollars) during my first 15 years of retirement." You have a clearer idea of what is involved in achieving the second goal and can plan for it more effectively. Remember to set a timeframe within which the goal will be achieved. 

Financial goals can be split into three further categories. Try to think of present needs as things you wish to achieve within the next two years. These may include getting out of debt, replacing a broken-down car, or paying school fees. It's important to write down your goals and refer to them occasionally to check your progress. Some financial goals can be easily achieved without much planning or are achieved automatically. 

For example, you may all of a sudden find that your bank account is over the minimum needed to pay the $4 account fee. Other goals will require detailed planning and consideration of various options. For example, if your children have left home and tertiary study is no longer an issue, the right amount to pre-fund may be nil because the costs can be met out of current income. Or, if taking out a lump sum may win a discount, you may decide to build a portfolio specifically earmarking a certain amount to be spent on tertiary education.

Creating a Budget

Now comes the hard part. It's time to take a look at everything you've spent money on and categorize it. This would involve sorting all your expenses into groups like food, entertainment, clothes, etc. 

Then, determine the total amount spent in each category and compare it to your expectations. This will show you exactly how much you are spending and what you are spending it on.

Non-fixed expenses are expenses that vary each month, such as groceries, entertainment, clothes, etc. A good way to start tracking these expenses is to write down everything that you spend money on. 

This may sound simple at first, but you will find that it becomes difficult to keep track of all your expenses as money is usually spent in small amounts. An effective way to do this is to save all your receipts and write everything down in a notebook. At the end of the month, it will be easy to see where all your money goes.

To create a budget, you will first need to determine your monthly income and fixed expenses on a monthly basis. Your fixed expenses are expenses that do not vary from month to month, such as rent and loan payments. The next step is to total up your monthly income and subtract your expenses. 

This will allow you to see if you are spending more or less than you make. If you are spending less than you earn, the extra money can be used to cover expenses that were not considered. If your expenses exceed your income, then you will need to cut back on your non-fixed expenses.

See also→ Golden tips to reduce your expenses and achieve financial savings

Tracking Expenses

Your budget should also include savings and debt payments, and all other expenses should not exceed 20% of your net pay. People with high debts or unpredictable incomes should attempt to spend less than 70% of their income to get their finances in order. This includes any expense reductions needed to build up savings and pay off debts. 

Use Figure 2 as a guide to help organize a balanced budget. Be sure to make occasional changes to update your budget categories and reflect your goals. Periodically tracking your expenses and comparing them to your budget will improve your budgeting accuracy and increase the probability that you will meet your financial goals.

After tracking your expenses, it's time to create some realistic spending categories in your budget. Start with necessities such as housing, food, transportation, and utilities. These should total less than 50% of your net pay. If your total expenses are greater than you intended to spend, you will need to cut back on your spending. 

If you do not have an accurate idea of what you are spending your money on, examine the table of your expenses (page 2) for that category. This will help identify your dominant spending habits and allow you to be more mindful about your spending in the future.

To get a clear idea of where your money is going, track your expenses for a month. Write down what you spend, when, and how you pay for any purchases. After a month, categorize your spending using a worksheet such as Figure 1. Add your expenses up and compare this sum to what you were expecting to spend. The closer these two totals are, the more you are in control of your financial situation. 

If your total expenses are greater than you intended to spend, you will need to cut back on your spending. If you do not have an accurate idea of what you are spending your money on, examine the table of your expenses (page 2) for that category. This will help identify your dominant spending habits and allow you to be more mindful about your spending in the future.

Saving for Emergencies

People who experience a large, unexpected expense may turn to long-term solutions such as borrowing from banks, credit unions, or getting credit cards, loans, or a mortgage. During times of financial distress, these are good for getting back on your feet, but can result in increased dependency and increases in debt. 

It is obviously important to have insurance to protect your home, health, and possessions, but it is also important to ensure that you are not over-insured. An excessive amount of insurance is a waste of money. If an insurance policy is adequate, it shouldn't require additional coverage at a later date. You may need to regularly reassess insurance policies and this process in itself may provide some savings. 

High deductibles usually lower premium costs, putting more money in your pocket. The key to avoiding debt in such situations is saving money. The idea is to save a small amount regularly so that it adds up to a large sum of easily accessible cash. 

This reduces the need for long-term borrowing and will reduce the total cost of the distress. Before considering to save, prioritize a budget to ensure that you are spending less than you earn. This requirement may involve lifestyle changes and even the need for part-time work.

See also→ How to achieve your financial goals in simple steps? Smart financial tips

Smart Shopping and Investment Strategies

The only lifestyle change that worked for me was doing all of my shopping online. The internet is a great tool to comparison shop to your heart's content. You don't need to drive from store to store, and there are no pushy salespeople that give you dirty looks when you walk out of the store having bought nothing. 

Using price comparison websites and services have saved me a ridiculous amount of money, often receiving the exact same product I was going to buy at a store, still sealed in the box at a steep discount. Patience is a virtue, and it still holds true when trying to save money on a purchase. More often than not, waiting for deals results in a cheaper purchase in the long run. This is also true when considering any high-dollar purchases or stock options.

Probably the most common way to save money is to reduce spending. One of the easiest ways to go about this is to lower food expenses. If you eat out regularly, try going to cheaper restaurants, or just try to eat out less frequently. It might be difficult at first, but eventually, you will realize that it is possible to eat one meal a day instead of two. 

If you are actually cooking meals, eating leftovers instead of making a new meal is another great way to save money. A good way to test if savings analysis is to avoid buying food that you don't need, simply because it's that is, putting a reasonable limit on impulse buys. Impulse buys are generally large money sinks because anything that seems like a good idea at the time can be a good excuse to spend $20. Set a monthly limit on food purchasing and stick with it.

The amount of money you have to spend can be directly correlated with the amount of stress you feel. Saving money creates a safety net, as well as a sense of calm when you are able to make an educated purchase or investment, freeing up your finances. Generally, spending less than you make is a good plan, which means finding ways to cut costs on anything ranging from food to stock options is a sound investment. 

There are a lot of different ways to save money in today's day and age, so finding what works best for you often requires trial and error. Below are a few money-saving tips that you might want to try for yourself. Some might work better than others, as everyone has their own way of dealing with stock options and expenses. The important part is staying proactive and proving to yourself that you are able to set money aside.

Comparison Shopping

Comparison shopping is a proven method to save money, and since there are so many options out there, it will pay to spend a bit of time identifying the best price. Here, flexibility and time are your allies. The internet is a great tool for comparison shopping. 

Be sure to shop at well-known, highly rated websites, and keep a lookout for special deals and free shipping. Don't ignore traditional methods; sometimes walking into a store and speaking with an employee about price matching can yield significant discounts. Make sure to compare products based on bottom line price, taking into consideration tax and shipping, to ensure you are getting the best deal. 

Be sure you are comparing identical products, similar products are not always the same and the cheaper one may cost you more in the long run. Consider the durability and life of a product, and be prepared to spend more initially for longer lasting items. Be careful not to get pulled in by "bargain" items. 

You weren't "saving $200" if you bought something for $300 that you didn't intend to buy in the first place. Finally and most importantly, once you make a purchase at a certain price, avoid looking at the price of that product again to ward off feelings of regret. Know that you found the best deal available to you at the time and be happy with it.

See also→ 4 Simple steps to saving money to build your financial future

Using Coupons and Discounts

Using coupons and discounts can help you save a great deal of money. People are often embarrassed to use them, but they are a way of using money more efficiently. Coupons are good on different types of products. They can be found in newspapers, magazines, the internet and on product labels. Look out for coupons in stores as well. 

Having a store coupon combined with a manufacturer coupon is a great way to save double. Doubling the coupon will also greatly increase your savings. But, be careful not to use a coupon to buy something you would not normally buy just because you have a coupon for it; only use coupons for items that you would normally use. 

Another way to save is to take advantage of sales. Pay attention to flyers and plan your shopping and meals around what is on sale at the grocery stores. Also consider buying clothes at the end of the season when they are usually marked down. Generally using sales along with a coupon is the best way to get the lowest price on an item. Keep in mind that no matter how good of a deal it is, if you do not need the item now is not the time to buy it.

Investing Wisely

Investing is a complicated process, and it requires patience, knowledge, and an understanding of the market. It's a good idea to begin with some background research on the stock market. The stock market gives average people a chance to make some extra money, but the risks can often outweigh the returns. 

Make sure to understand the market before making any investments. It's often a good idea to start out with a simulation of the stock market to practice understanding the market and various processes. Various analysts advocate various approaches, but for the beginner, those who are investing small sums, a low-cost index-tracking exchange-traded fund (ETF) is likely to be the best choice. 

With this and the pitiful earnings rates on cash in mind, if you have a mortgage and you aren't maxed out in your tax-free ISA allowance, then paying off your mortgage is likely to be more beneficial than placing the money in any savings scheme, provided you won't be stung with redemption penalties and the like.

See also→ How to save money and build a prosperous financial future?

Conclusion

In conclusion, the skill of saving money is not only essential for achieving financial stability, it is also a crucial step towards achieving financial freedom. By applying the tips and strategies we mentioned in this article, you can build strong financial management habits that will allow you to enjoy a more comfortable and secure life. Remember, every penny you save contributes to building your financial future, and every small step in managing your expenses is a big step towards achieving your big goals.

Don't look at saving as a daunting task or an unwanted austerity, but rather as an opportunity to enhance your independence and secure your future. Additionally, investing in money management knowledge and skills will pay huge dividends, giving you the confidence to make wise financial decisions that support your long-term goals.

The journey of saving and financial management is continuous and evolving over time. Continue to evaluate your consumption habits, make clear financial plans, and don't be afraid to look for new ways to boost your wealth growth. With perseverance and commitment, you will find that you can not only improve your current financial situation, but also ensure a prosperous future that allows you to live in peace and reassurance.