As someone who has spent the majority of her life living paycheck to paycheck I’ve learned about all the things done wrong when it comes to saving money. There are so many frugal living tips and tricks. Along with a million and a half ways to save money. Let’s face it setting up a savings plan is extremely difficult when you live on a small amount of funds as it is.
If you want to start a savings plan the very first steps are increasing your income and decreasing your expenditures. By decreasing how much money goes out of your home and increasing how much comes in you can follow this type of savings plan.
As a warning before you continue, my savings plan is a goal to work up to, I am still working up to that goal. It is not something that is easily achievable and there are MASSIVE sacrifices that have to be made to work up to this goal. However, the payout in the end is worth far more than all the effort you put in while you work up to this.
How to Save Money
I’ve read a lot of different ideas when it comes to saving income. I’ve heard of the 50-30-20 rule. The envelope savings plan. Additionally, the a few dollars every month to save a certain amount by the end of the year. Before I get into the ideal savings plan let’s talk about these most popular savings plans and why they fall short.
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The Save A Few Bucks Monthly
I like to call these plans the “mad money” plans. These are great plans to have above and beyond your normal savings plan. These are the vacation savings plans and the Christmas savings plans.
While fantastic for short term money goals in the long run that couple thousand dollars by the end of the year is not going to go a long way to meeting hefty financial goals.
Now, if this is all you can afford to do at this point in time that is great and you should absolutely do it. Saving a little is always better than saving nothing at all.
The Envelope Savings Plan
The envelope plan revolves around using cash and cash only. In theory this works well because you are only allowing yourself a certain budget for all of your expenses and then everything else is put into savings.
For those who have a hard time with money this plan can end up being a disaster if you are not strong willed. You have to set strict rules upon yourself to keep yourself from using money in another envelope.
Do not get me wrong, this plan has worked for a lot of people. You need to have strength to leave the cards and envelopes at home though. Do not keep all your envelopes in your purse.
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The 50-30-20 Plan
This plan is 50% of your income to expenses, 30% to personal choices, 20% to financial obligations. This means you live off 50% of your income, spend 30% on lifestyle which is things you can live without but don’t want to, and 20% to your debt and savings.
Ultimately, debt is the #1 expense in most households. We have college loan debt, credit card debt, mortgages, and car payments. These are all debts that we have that should be paid off faster than what a 20% allowance offers.
I do believe that this plan should be the plan you use to step up to the ultimate savings plan. This plan prepares you for that leap and it’s a lot more doable for a lot of households. So while you are increasing your income and lowering your expenses work with this plan until it makes sense for you to switch to the next.
The Ultimate Savings Plan
I’m going to forewarn you. When you read this plan you are going to think I am absolutely insane. This is why I say work up to this plan. Start off with a “mad money” savings plan, then move up to the 50-30-20 plan, make it a goal and work towards the goal of the plan below.
It’s a 50-30-20 plan except this plan will make sure you save enough money that you can get out of debt faster and have an actual savings net that could completely change your entire lifestyle. 50% of your income directly to savings, 30% of your income to expenses, and 20% to personal choices.
If you take 50% of your income and put it directly into savings within 6 months you will have enough money to live off of in case of job loss, disability, or family crisis. If you knew that you were safe for at least 6 months in case of job loss your stress levels would decrease drastically.
30% of your income to expenses should cover; rent or mortgage, car payment, insurance, utility bills, food and gasoline. By decreasing your absolute must have costs to the point of only using 30% of your income to cover it you are increasing your chances of survival in cases of emergencies.
By leaving 20% of your income for personal choice you can still indulge in life and not sacrifice all of your luxuries. This would include cable TV, pizza night, date night and other fun activities.
How to Use this Plan to Pay Off Debt
Here’s how this works. With the 50% you are putting into savings go ahead and make the minimum required payments for school loans, medical debt, and past credit card debt. You should still be putting away money into a savings account after these payments.
The first thing you want to pay off early is your car loans. Once you have $3,000 to $5,000 above the remainder of your car loan saved go ahead and pay off that loan. After that you will start saving up for the next big pay off always making sure to have $3,000 to $5,000 additional in savings when you pay off the debt.
Paying off your car will decrease your expenses giving you more money that you can upgrade where you live by an extra couple hundred dollars a month. You still don’t spend over that 30% but you have more to put towards your standard of living.
Additionally, by always having a few thousand dollars in savings you will always have emergency funds for car repairs, house repairs, or any other random repair that comes up.
Why You Need This Plan
As someone who has lived the majority of her life living paycheck to paycheck I understand that emergencies can completely destroy a family. By striving to have this type of savings plan you are absolutely prepared for the worst case scenario.
Additionally, by being prepared for the worst case scenario you are rarely actually faced with that scenario. I don’t know what it is about being prepared that reduces the possibility of emergency situations but whenever I am prepared it rarely happens.
Plus wouldn’t it be nice to not have to plan paying your bills around when you get paid. To just sit down and pay your bills because the money is there. This type of plan puts you in this situation.
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I’m not saying that living with this sort of savings plan is at all easy. However, if you work towards living with this plan you can get there eventually. By increasing your income through raises, side hustles, or second jobs, you can eventually get to a point where your debt is paid off and you’re expenditures will be far less.
Learning to be smart with your money is a difficult task. Getting to a point where you are comfortable living small so you can have a good chunk of income saved is difficult. It’s worth it when you own your cars and home. It’s worth it when you pay off the last of your debt. Furthermore, it’s worth it when you no longer live counting down the days till your next paycheck.
Could you live with this savings plan in order to be debt free and have enough money put aside that you never have to worry about emergencies? Leave a comment below letting me know your thoughts. Follow me on Pinterest for more like this and pin this to your budget and frugal living boards.