Our brains are both a bliss and a curse. They help us find ways to get money only to imagine new ways of spending it.How are we ever supposed to build up savings accounts?
Let me illustrate case in point.
I was meeting a friend for a cup of coffee a copule of weeks ago. At some point in the evening, he complained about not having enough cash to travel to Asia for a quick vacation.
I was surprised to say the least. Let me clarify: he is single. He does not have kids. His rent is ridiculously low. He hardly travels, does not have a car, a morgage or any other heavy expenses. And to top it off, he is pretty well paid. So when I asked him where the hell his money was?
His response was:
– “Well you know, it is hard to keep track of money. I struggle to have a positive balance at the end of each month”.
Yes dear friend, I know what it is like. We subconsciously make it our duty to return to zero balance at the end of the month. Hence the need to consciously and rigorously build up savings.
That’s why, a long time ago, I came up with a strategy to prevent my brain from screwing me up.
Build up savings – first principle: pay yourself first!
I have 5 automatic wire transfers that are programmed to fire up at the beginning of each month:
- 23% of my salary goes into my savings account
- 4.4% goes into my travel account
- 10% goes into my first groceries account
- 4.4% goes into my second groceries account
That leaves 47% of my salary for rent (20%), taxes (15%), and random expenses (12%: public transport, various bills, a few nights out, presents, etc.).
These are 5 separate bank accounts with 5 different credit cards. Nowadays it costs nothing to open an online bank account with a debit card so might as well use it to compartmentalize your life.
I never touch my savings account, unless to make an investment (hire an editor to review my books, place money on an index fund, etc.). I remember breaking my rule twice. Each of them was to get an advance on a big sum I had to pay when travelling for work, which I got back one month later.
Some of my investments do not pay off of course, but I do not see that as a waste of money. That’s simply the price I paid for learning that it was a bad decision.
All my passive income goes straight to my savings account also (minus the expenses of course: hosting websites, ads, etc.). More on my yearly passive income report.
I am comfortable with the money I put in my travel account. It allows me to travel with my wife within Europe every two months (she also follows a similar savings pattern). Where we go depends on the budget available. E.g. either we go to Paris for a weekend next month or we wait two months so and stay for a whole week (because we would have saved enough by that time).
Money in my groceries accounts is for immediate spending. We usually eat out around 1 night per week, sometimes two. The rule is simple: do we have enough budget left in the groceries account or the regular account to go out? if yes, we do so. If not we take wine, buy some meat and cook a nice meal home.
A zero at the end of the month does not hurt anymore
The funny thing is, I always manage to end up with a round zero on my spending accounts (groceries + current). Everytime I think, “oh nice, we will have an extra 100 euros to play with at the end of the month”, some unexpected thing comes up. I am sure you know the feeling very well.
But, I do not feel guilty one bit! I already paid myself at the beginning of the month (savings + travel account). Anything else is just bonus I am not counting on anyway. So I blow out the rest of my salary with a happy smile 🙂
Of course, you may spend more on travelling, and less on groceries but more on rent. The point is, however, you need to have a fixed cash distribution strategy to build up savings. It is only normal after all to pay yourself first before some rich shareholder at a phone company or your landlord..Basic survival instinct.