There is no doubt about it, we are in the roaring 20s. We certainly started off the new decade with a bang, and not in a good way. In the midst of so much uncertainty, saving is even more important because savings provides safety and options. Below are my top tips for saving money in 2021!
Review Your Expenses
If you want to save money in 2021, then you need to find out what you spend you money on.
There are two types of expenses:
Needs are the nonnegotiable expenses in your life such as food, housing, and health care. Simply put, needs are expenses that you absolutely must pay in order to survive.
Wants are all the extras that tend to make life more enjoyable. For instance, traveling, eating out at restaurants, or enjoying a relaxing spa day.
The Fuzzy Grey Area
There is a fuzzy grey area between needs and wants. As you go through life and earn more money, it is highly likely that you will experience something called, Lifestyle Creep. This is a term to describe lifestyle inflation.
Basically, it works like this: Typically, as a college student, one does not have vast sums of money at their disposal. As a result, college students tend to have roommates, live in less expensive apartments, eat at restaurants less often, and wear more affordable clothing brands.
Once that college student graduates and they find a job, they have a little more disposable income. In response, the college student upgrades their living accommodations. They decide to live close to their new job, in an area with lots of things to do as a young adult.
A year or two later, their disposable income increase a little more and they upgrade their life a little more. Perhaps they decide to have their own apartment and wear more expensive clothing brands. After all, they are getting older, are more mature, and need their own space as well as an upgraded wardrobe to match.
Lifestyle Creep happens slowly, its often unnoticeable. By the time you are in your 30s, do you think you could ever live the same way you did as a college student. Chances are you just scoffed at the thought.
Once you become accustomed to Lifestyle Creep, its so hard to go back.
My point is this, you survived as a college student living an inexpensive lifestyle. Your needs were met and you survived.
When evaluating your expenses give yourself an honest evaluation about whether something is truly a need or actually a lifestyle upgrade. You do not need to give up the lifestyle upgrade, but you should acknowledge it.
For instance, do you NEED to live in the downtown high-rise?
Create a Budget
Once you know what your expenses are, you can create a budget! A budget is your road map to successfully saving money in 2021. It does not sound fun or exciting. In fact, the word budget usually elicits a groan and the mere thought of taking the time to create a budget is so unappealing, you may just want to close out of this post right now.
Before you do, hear me out…
Creating a budget does not have to be this complex, time-consuming process. Especially if you already took the time to think about your expenses.
There are endless ways to create a budget. However, it all comes down to revenue and expenses.
When you create a budget answer these three questions:
- What income do you bring in each month?
- What expenses are you required to pay?
- How much do you feel is reasonable to spend on wants?
If you need help creating a budget, check out my step-by-step guides here:
Set SMART goals
SMART is an acronym for Specific – Measurable – Attainable – Realistic – Timely.
Developing not just goals, but SMART goals will help you stay focused and motivated. Living on a budget is not easy. Far to many people try to sell the easy, fast fix. Sounds great, but it just isn’t reality.
If you first begin your savings journey by thinking its going to be easy and fast you are in for an awakening. Push through the frustrations, push through the hard, push through the doubt. Know when you begin saving money in 2021, this is going to be a challenge, and you are up for the challenge.
Learn how to create SMART goals here.
Cut Where You Can
Saving money in 2021 means finding where you can cut expenses. This is where that fuzzy grey area mentioned above comes in.
Think about the areas of your life that you can live without. It does not mean it’s going to be an easy adjustment, it simply means you can live without.
Do you NEED that downtown high-rise apartment? Or is it possible to move to a less expensive location?
Can you forego weekend brunch with your friends once in awhile? Would your friends be understanding and supportive?
Do you need the latest Travis Scott sneakers? How about that Chanel purse?
How can you make your vacation just a little more affordable? Can you stay at an Airbnb or hostel instead of a hotel?
Challenge yourself to save money but do not cut to the point of being in a state of absolute misery that you will not stick to your budget.
One of the best ways to save is to streamline. Automation is one of those things that actually does make your life much more simple and easy.
Have you ever heard the phrase:
The rich are wealthy because they pay themselves first.
Before you even receive your paycheck, set up your 401(k). Ideally, you will max out your 401(k) each year. For 2021, this equates to $19,500 for those under 50 years old. If you are 50 years or older, then you can contribute an additional $6,000.
However, maxing out your 401(k) might not be possible right now. That is fine. The absolute minimum you need to contribute is the amount of your employer match. If this is 6% then your minimum is 6%, if your employer match is 3% then your minimum is 3%.
Somewhere between the minimum and maximum is where most people fall when deciding how much to contribute to their employer sponsored retirement plan.
After setting up your 401(k) contributions, have a portion of your money automatically deposited into a savings account.
Try to save at least 10% of your income after your 401(k) contributions. To make things simple, let’s say you earn $2,000 per pay period. You decide to allocate 15% of that amount to your 401(k) or other employer sponsored retirement plan. This means $300 goes to your 401(k) and the rest goes to you. Of the remaining $1,700, you want to save 10%. You set up an automatic deposit with your employer so that $170 goes into your savings each pay period. The remaining $1,530 goes into your checking account.
Setting up auto-pay for your mortgage/rent and utilities is also a great way to simplify your life.
Once you have all of your obligations taken care of, you can spend the rest of your money as you see fit.
Quality Over Quantity
You will end up saving more money by spending money on quality good and services.
For instance, say you need to repair your roof. This is a huge expense and you want to do your due diligence. You look online for roofing contractors and ask for three to stop by your home and provide an estimate on the amount it will cost for repairs.
Each option is expensive. However, one stands out as the least expensive. So, when its time to make your choice, you go decide to hire the least expensive contractor.
What’s next? Well, you pay the deposit, the contractor is scheduled, and the day finally arrives to get your roof repaired.
Unfortunately, this particular contractor is not very punctual. The roofing team shows up late, leaves early, and their work is pretty bad.
You end up needing to get a different contractor to come out, fix what was done, and finish the job.
This ends up costing you a couple thousand dollars more than the most expensive estimate.
Pro Tip: You get what you pay for.
This might seem like an extreme example, but the concept is true across the board. If you buy cheap IKEA furniture, its likely to fall apart, or even worse, cause injury.
A great alternative is to buy quality goods secondhand at a fraction of the price. It will take a little more work and require some extra patience, but you will end up saving a lot of money.
Last but not least, the emergency fund. There is no better time to start saving for an emergency fund than the present.
An emergency fund will catch you when you stumble. This is your safety net when things start going downhill.
Build up a minimum of 3 months worth of expenses in a savings account and don’t ever touch it unless you run into an actual emergency.
By emergency, I mean you lose your job and can’t pay your mortgage, face an unforeseen medical expense, have to do an emergency home repair such as a water leak or furnace replacement (not a renovation).
Build your emergency fund before maxing out your 401(k). Just to be absolutely clear, still contribute to your 401(k) however, only contribute up to your employer match until your emergency fund complete.