Saving & Budgeting -

Savings

When a household’s income exceeds their expenses, they tend to make some savings. Savings is defined as after-tax income minus consumption.

Making savings is dependent on a people’s choice, because, sometimes, when an income of a household is increased, they might prefer upgrading their capital, rather than saving it.

For example, when your income increases, you have some extra money that could be saved, but you might consider going out to eat three times a week instead of one, or you might start taking a taxi to work rather than a bus or subway.

So as you can see, saving depends on a household’s choice and preferences, but as you might already assume, saving might be crucial for particular situations.

There are many advantages to savings, no matter if your income is low or high.

First of all, savings give you a guarantee of financial independence, even if you lose your income source. It is recommended that you use the principle that suggests saving money that will cover 6 months’ expenses. For example, if you spend 3000$ every month, you should have 18000$ as your savings, so that you could live without problems before you find a new source of income.

Another advantage is that savings are a great way to cover unexpected expenses. As you know, even if your budgeting plan is perfect, there is still a chance for unexpected expenses to occur. It might be a friend’s birthday or wedding party, it might be medical costs, it might be car damage, and so on. In these cases, savings could become a life-saver.

Besides all of this, savings could be used for funding your goals. However, it is important to know exactly what your plan is, in order to determine how much you should save. As a bonus, in this situation, your motivation for saving is highly increased.

One of the most important advantages is that savings could be used to provide for yourself during retirement age. Some countries even have a pension fund, which means that when people work, some percentage of their income is accumulated till the retirement period of time. As you might have already assumed, it is a great way to live without worries.

Savings give you an opportunity to treat yourself. When you want to go on a vacation, you do not have to worry about the financial part if you have savings.

But the most rational use of savings is investing in them. For example, if you have savings and go to the bank to make a deposit. The bank then will add an interest rate, so the amount of their money will increase. They might also consider investing their savings somewhere else and get even more interest from it. So, as you can see, savings might be a source of income if you think like a rational person.

While talking about savings, we can take a look at another life-simplifier:

Budgeting:

Budgeting itself is a plan of income, expenses, and savings distribution, which helps people to line up the whole month or quarter or even a year beforehand so that they know how much they can spend on different stuff. The budgeting plan is excellent for those people, who have fixed incomes.

For creating a budgeting plan, it is important to define the period of time, when a household has income. Usually, it is once a month, but it could be 2 times a month, it could be quarterly, etc.

After defining the period, the next step is calculating the overall income. It could be a salary, leasing income, some freelancing jobs, a present for a birthday, and other ways of getting money.

The next step is to determine your estimated costs. Expenses could be fixed and variable as well as income. For example, rent, loan interest, and some utility costs are fixed, but going shopping or going to the theater are variable expenses and could be taken into calculation accordingly.

It is also crucial to separate necessary and unnecessary expenses. You should think well, before adding unnecessary costs, because it will have an impact on your overall balance, which is left after excluding all the expenses from your income.

After calculating the balance, if it is less than zero, it means that your expenses are more than your income and not only you won’t be able to save, but you might end up in debt.

If your balance is zero, it means that your income covers your expenses, but you are left with nothing to save. If your balance is more than zero, it means that you could make savings.

It is important that the balance after excluding all the costs is more than 10% of total income. In that case, it means that you will be able to make an optimal amount of savings and it is worth it.

After making the saving, the last thing is to determine its purpose of it. You should decide how you want to use it: You want to deposit it in a bank, you want to buy a new gadget, you want to start a business, or just put it in a safe.

However, most people still need a push to save, as they tend to spend all their incomes right away and the practice of saving is mostly found among people with higher incomes. The reason for that might be the lack of information about savings, that is why It is crucial to learn the importance of savings, in order to understand what it is for.

It is also important to know that whatever your choice is, savings will always have a positive effect on your lifestyle as long as you act rationally. The important thing is to not forget to account for your budget accordingly. It will make your life easier, and you will be much stronger, independent financially. Savings is a guarantee of a better standard of living.