How to build your savings

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8 October 2018
“The way to build your savings is by spending less each month.” - Suze Orman

We want to end savings month on a high note, so we’re sharing some good news: you already have everything you need to sort out your finances.

Much as we enjoy daydreaming about a future where some event or person changes our financial lives, the money we earn and spend every month holds the key to a stress-free financial future.

In her excellent book Manage Your Money Like a F*cking Grownup, Sam Beckbessinger writes about the savings ratio.

This is something you can monitor to see if you’re getting better or worse at managing your money.

How to calculate your savings ratio

Divide the amount of money you put towards savings and paying off debt by your after-tax income. Times that by 100 to get a percentage. That amount is how much money is going towards your future. It is your challenge to get your savings ratio higher every month.

For example, let’s say you earn R15,000 after tax. You spend R1,500 on paying off your credit card, R2,000 towards retirement and R1,000 towards your tax-free savings account. Your savings ratio is:

(1500+2000+1000)/15000*100 = 30%

How to get your savings ratio higher

There are two ways to improve your savings ratio immediately, but one is much easier than the other.

The hard way is asking for a raise or supplementing your income through a side-hustle. If you’re employed, you have to convince your boss you’re not getting paid enough. They probably won’t agree with you.

If that doesn’t work, you have to find a way to earn extra income. At the very least you’ll need to find more time to do the extra work. If you’re hoping to start a new business, the time and energy you need to invest could take a while to bear fruit.

The second way is by reducing your cost of living. This is much easier, because you are completely in control and you don’t need anything you don’t already have.

Finding ways to spend less might require creativity and trial-and-error, but it will also help you feel much more on top of your money.

How to reduce your cost of living

If you’re really serious about improving your savings ratio, you can take extreme steps. As Stealthy Wealth pointed out in this excellent article, starting with the big expenses will have the biggest impact.

This might require some drastic lifestyle changes, though. If moving to a cheaper home or getting rid of a car seems like too much of a commitment, you can start by saving on the margins.

“Saving on the margins” means you make a lot of very small changes that all add up to a great savings. You can start by reducing how much money you spend on day-to-day items like groceries, eating out and petrol. You can get rid of subscriptions you don’t use, calculate cost per unit to figure out if you’re paying more for something than you need to and reduce your insurance premiums every year.

There are many frugal online communities who love to share their tips and tricks for small savings that make a big difference.

How to use your savings ratio

The higher your savings ratio, the closer you are to financial independence. Your goal is to try and improve your savings ratio by as much or as little as you can every month.

Unfortunately you can only improve your savings ratio every time you earn an income, so use the time between incomes to strategize your next move.

See how you can reach your investment goal with our investment calculators.

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This article does not constitute financial advice as it does not take into account one’s personal financial circumstances. Please contact OUTvest before implementing any financial plan or advice to ensure that you make an informed decision. 
 
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