Do you know who is Warren Buffet? The chances are you definitely would. He is one of the richest men alive on Earth and the chairman & CEO of Berkshire Hathaway, an American multinational conglomerate holding company. He is also a wonderful philanthropist who has pledged to give away 99% of his wealth to charitable causes. And yet, The Business Insider calls him a notoriously “frugal” billionaire.
With a net worth of $82 billion or more, Warren Buffet still lives in the house he purchased in 1958, drives a modest car, and uses a flip phone. One of his top philosophies shared out of all his experience in accumulating so much personal wealth is the saying “Do not save what is left after spending, but spend what is left after saving”. Now, if the world’s third-richest billionaire can live frugally and advice that saving first before spending is one of the ways to get rich, why wouldn’t you or anyone blindly follow that?
Also called “Pay yourself first”, this principle of saving first and spend next is an important tip that has not only helped Warren Buffet but countless others as well to ensure their futures and gain control of their financial lives.
Simply put, this golden rule of saving first is to set apart a significant amount of your monthly income as savings and then spending the rest on your monthly expenses.
If you are already following the save first, spend next rule, many kudos to you! Consider using an app like NumReceipt to make it even easier to stick to your financial discipline. With many useful features such as receipt scanning, category wise expense tracking and managing multiple bank transactions through one unified tracking mechanism to name a few, NumReceipt can ensure none of your expenses are missed out ever.
However, if you are one of those who have always been thinking of saving first but just couldn’t get a handle on it to put it into practice, do not fret. We’ve got you covered. Here is some simple but effective step by step ways that can help you put this into practice and finally get into the journey of financial freedom.
How to get started with saving first, spending next
To get started with this philosophy and start practicing this “financial lifestyle”, first pull out your past NumReceipt or other expense tracker data from the last six to twelve months whether they are written in paper or haphazardly put into an Excel sheet from memory. Make sure all your expenses are categorized and your incomes for those months have been input accurately.
Now, divide those expenses into essentials and non-essentials, i.e. need versus want. Was the dinner bill at the restaurant spent for a critical business meet with a potential client or was it a spur of the moment ‘pat on the back’? You know what we mean.
By doing the above, you will know what you could just never have avoided spending on in the last few months. Calculate the average of the past six/twelve month’s essential expenditure. Find out your average monthly income as well if it differs from month to month, especially if you are a small business owner or an entrepreneur without a fixed salary.
Calculate what percentage of your average monthly income goes into financing your current lifestyle i.e. what % of your income are your expenses? Mind you, we are only including essential expenditures here. Is it 50%? 60% or even more?
Whatever number it is, we only hope that is not more than 90% or worse exceeding your income. If that is the case, you need to find yourself a supplementary income asap or consider drastically downsizing your current lifestyle and the related expenses. However, if it is less than 80%, you are in a good stand.
What was your corresponding saving percentage in those months? Were they equal to expenses? It is a good idea to save at least 20% to 30% of your income every month into an account you would never touch for a frivolous purpose or unaccounted expense. Did you do that? Or did you not save at all?
If you have saved but it is negligible compared to your expenses, consider increasing it by 5% every month until you reach at least 30% of your total income.
If you have not saved at all, then you must wake up before it’s too late. Depending on the % of essential expenses that are taking away your income which you just cannot cut down, calculate what you can save while still having enough to eat, pay rent and insurance. Categorize any other expense as non-essential. This should come to at least 10% of your income.
Starting immediately from your next paycheck, save this amount without fail.
Increase it slowly over the next few months until your saving % reaches 20 or 30%. Take up another part-time job if required to finance your savings.
As you follow the above steps, soon, you will get into the habit of saving first and spending next.