There used to be a scary statistic floating around the internet: that the average American Family has less than $1000 in savings. (GoBankingRates)
And this could be true. But then statistics from Bankrate about the average American family having ~$8,000 in liquid savings could also be true.
I think, as with all statistics you find on the internet (or anywhere, really), we have to take them with a large grain of salt. It appears the amount the average American family has in savings depends largely on who you ask.
But whether you have $1,000 or $8,000, everyone has to start somewhere and that’s what I want to talk about today.
CNBC recommends your savings account start at $500. Here’s why this number is important:
- Having just $4-$500 saved for a rainy day is enough to break the paycheck-to-paycheck cycle and until you break this cycle, real wealth-building just isn’t possible.
- It may take a year to save up your first $500, but I believe the propensity to save is like a muscle. The more you flex it, the stronger it gets. You can save $500 in one year, and then work up to saving $500 per month (which by the way, is the amount you need to set aside if you want to max out your IRA contributions each year).
- $500 per year is just $41.66 per month. The average American paycheck is ~$75k before taxes, or around $55k after tax which breaks into $4,583. Saving $41.66 per month is less than one percent of your monthly take home pay.
- Make well below the American average? Even those making $36,000 per year take home ~ $29,000 after taxes. $41.66 is less than 2 percent of your monthly take home salary.
All of this to say you can and should have $500 saved, but no judgement if you don't. Here is where to start.
So, where do I start?
Great question. If you make a decent amount and just have a hard time cutting back on your lifestyle (I know this struggle all too well!) here’s how I saved $1,000 in 45 days on my $85,000 take-home salary via the use of automated savings apps.
But, if it’s going to take a bit more work and number-jiggering for you to get to that first $500 in one year, below is a bullet-proof five-step method to get you there. Seriously, it just takes five steps and a willingness to live within your means to break the paycheck-to-paycheck cycle. (Easier said than done, I know, but there really isn’t more to it than that.)
First, Break up Your Goal into Bite-Size Chunks
I just did a quick search on how many times I’ve written “bite size chunks” on my blog in the last eight years. The answer is…six…and counting. Clearly, I’m a fan.
I’ve already done this for you on a monthly basis:
$500/12 = $41.66 per month.
But if you wanted to take it one step further and make sure you’re saving bi-weekly for each paycheck, you can break it down like this:
$41.66/2 = $20.83
Second, open a separate savings account
This goes without saying, but I’m not a huge fan of keeping the $500 starter fund in your everyday checking account. It’s too easy to spend that way! Get a separate savings account. They’re free and digital and easy to use.
Third, account for $500 in your monthly budget
You might be wary about using a budget template because your finances are more spontaneous. However, there are several types of budgeting systems (complete with the proper template) that work around different lifestyles.
There's no one size fits all when it comes to budgets because no two lifestyles are the same. This is why (unfortunately) like dating or finding a doctor you like, you have to try out different ones to find one you feel like sticking with.
Here are the most common budgeting systems. You would just need to account for that monthly (or bi-weekly) amount in each of these alongside your other monthly expenses. Ideally, you’d save the same way you’d pay a bill, by paying yourself first.
- Zero-sum budget– The money you bring in and the money you spend or save each month is the same, so you are left with $0 at the end of the month. (Here is an example of a zero sum budget template.)
- General Monthly Budget: This budget requires you to commit to how much you will spend in each category at the beginning of the month. Throughout the month, you'll limit yourself to the money you've put aside for anything you could need during that time. (Here are four budgeting examples from other bloggers that I really like)
- Snowball Budget: For those of you who have several debts to pay off, this is a great system to use. After you've paid for your necessities, use whatever money is leftover to pay off your debts. As you pay off one debt, you can then apply it to the next debt until you are debt free. (Here is a great snowball budget template.)
And if it turns out that the system doesn't work for you, there's nothing to say that you have to keep using it! There are so many different systems out there that you could try a new one every month and keep going for years.
Fourth, keep a positive mindset
If you have the money mentality that your finances are a buzzkill, doing a budget and saving each month will feel like you're doing jail time.
However, when used properly, a budget and small $500 in savings can actually help you enjoy your life better. Here’s why:
- When you know how much money you have and where it goes every week, you'll be better equipped to save money and use it for things you want to do.
- Sticking to your budget will also help you meet those important savings goals so you can actually increase your wealth and net worth.
- Have you ever been one of those people who can't go and hang out with their friends because you don't have money? Or worse still, have you had to mooch off of a friend because you didn't have enough to pay to see the latest blockbuster? When you have a method to your money, you won't always look like the broke friend everyone has to take pity on.
When trying to save ask, “What motivates me?”
One of the best things you can do when you decide to implement a budget is figuring out why you are doing so. When you know why you want to get control of your finances, you can use that reason to motivate yourself to stick to it when it gets hard.
Last step: Just start small then refine
When trying to hit your first savings goal, I can't state enough how much “every little bit helps.” Birthday money from grandma, your tax refund. Get in the habit of saving at a regular interval – even if it's just 1-2 times each year. Even if you're kicking booty with your budget, it won't matter unless you're saving money for emergencies.
Sticking to your budget can be hard at first. It can also be discouraging when you go over budget on a consistent basis.
That’s why I recommend keeping a loose budget at first and refine it as time goes by and you improve at hitting your numbers. Trust me, once it happens, you’ll become addicted to sticking to your budget.
The Final TL:DR
Even if you have the best intentions, and have been good about sticking to rules, keeping a budget and saving money all of the time is hard, at least for most people. Life happens, and unexpected expenses will come up.
Remember your reason for controlling your finances and starting your savings nest egg, and these situations will be easier to deal with.
- The Top Money Saving Apps to Use This Year
- How to Stop Spending Money: 61 Things to Do Instead
- 82 Fun (NEW) Ways to Save