Now is a good time as ever to buckle down and build your savings. To help you increase your wealth, here are seven practical ways to grow your savings and work smarter, not harder, on your path to financial freedom.
The bucket method
Budgeting can be overwhelming, and who has time for complex spreadsheets? The bucket method simplifies this process. When your paycheque hits your account, immediately divide it into three buckets: necessities, fun, and savings. The easiest way to do this is through automation – set up your bank account so that your paycheque is split automatically on payday. Instead of dealing with one big pot of money, this ensures every dollar has a purpose and makes it easy to track spending in each category.
A common guideline is the 50-30-20 rule: 50% for necessities, 30% for fun, and 20% for savings. Let’s say that you make $60,000 a year after taxes. That means $30,000 would go into necessities, $18,000 into fun and $12,000 into your savings every year. Of course, the split may vary depending on your income, expenses, and location, so if this rule doesn’t work for you, explore the ways you can customize your savings plan below.
Determine your number
The first step in any savings plan is to define your goal. What are you saving for and how much do you need? Let’s say that your goal is to save $50,000 for a down payment on a house. Now you have a clear target to work towards. Writing down your goals increases the likelihood of achieving them. Setting a clear, measurable goal provides focus, motivation, and accountability.
Divide and conquer
Break down your savings goal into smaller, actionable steps. To save $50,000 in four years, you need to save $12,500 per year, $1,042 per month, or $240 per week. Using our previous example of $60,000 after tax, this savings goal is manageable if you set aside 21% of your income every year. By breaking down your savings goal and accomplishing these smaller milestones you’ll build momentum and maintain motivation towards your larger financial objectives. Try using a visual tracker like a whiteboard to stay on track and celebrate small wins.
Take a hard look at your finances
Budgeting doesn’t come naturally to many people, but think of it like planning a road trip. Budgeting acts as your financial roadmap, helping you plan your route, allocate resources, and avoid wasted time by taking wrong turns. When you start budgeting, you gain valuable information about your money, specifically how much money is coming in and going out. What often surprises people is their spending. At the end of the month when you add up all your expenses, you might realize just how much waste there is. That awareness is the first step towards taking action to improve.
Move the needle
Let’s talk about big wins. Small wins like skipping your daily coffee can help, but they won’t dramatically change your financial situation. Instead, focus on your top three expenses, which are typically housing, transportation, and taxes. Working with the 50-30-20 rule, necessities like your housing and transportation shouldn’t exceed more than 50% of your take-home pay. If you were to break it down even further for housing, aim to spend no more than 30% of your income and for transportation, stick to 10 to 15% of your income. For taxes, make sure that you take advantage of tax deductions and tax-free growth by saving and investing in your RRSP, FHSA, and TFSA.
Don’t let your cash sit idle
Avoid leaving your savings in a chequing account. Instead, use tax-advantaged accounts and invest your money. This doesn’t have to be complicated; it can be as simple as placing your money in a high-interest savings account. Another option to consider is GICs (guaranteed investment certificates) which are a safe way to earn higher interest income. It’s also worth learning about investing in ETFs (exchange-traded funds) for growth or dividends.
Think long term
These tips can help you grow your savings. Now, let’s talk about how to compound those savings. There are only two ways to accelerate your savings – you can decrease your expenses (which means the lowest you can go is $0) or increase your income, which essentially has no limit. To enjoy the fruits of your efforts in the future, you need to start planting the seeds today.
To increase your income, one action you can take is finding ways to build multiple income streams. One of the easiest ways to start is by investing in your own skills – by improving your existing skills or learning an entirely new skill. This can lead to a promotion at work, allowing you to earn a higher salary or it can help you start a side hustle or even a full-fledged business. Whatever route you choose, by increasing your income over the next few years while keeping your expenses steady, you can accelerate your savings and achieve your financial goals even faster. Interested in learning more? Check out this video.
Disclaimer: This article is not intended as financial advice, and you should not make financial decisions based solely on the information presented.
Gabrielle Chung, CPA is the founder of Balance and Wealth CPA. She is also the creator of the YouTube channel @GabrielleTalksMoney, which aims to help young professionals and millennials achieve their money goals.
