Amidst a pandemic, working from a 4×4 room, having limited moments of adventure, a political divide unparalleled to anything we have experienced before and many other moments of stress from the past few months, a pressing question remains on the minds of most: How Much Should We Really Be Saving Right Now?
Most of us may have enrolled in a finance course in college, began learning what money was once we started receiving our first real paychecks, maybe we were lucky enough to get a money lesson from parents, we’ve stuck to some rule of thumb or we rarely check our accounts and hope for the best.
Money guru and millennial personal finance author and founder of Statement Cards, Stefanie O’Connell Rodriguez, says ultimately our money savings strategy should be shaped by two things; first, where you’re starting from and secondly, where you want to go in the future. You can’t make a plan for where you want to go until you get clear on where you’re starting from. “That means taking full inventory of your financial life – how much you have in checking, savings, investments and other assets – and how much you owe – student loans, medical debt, credit card debt, car loans,” said O’Connell. Once you can view and understand the full picture, you’ll gain clarity on what needs to be prioritized and where to get stared. O’Connell actually has a free 7 day challenge that helps walk people through this process.
O’Connell also had some thoughts on the secret formula to money saving and these rules of thumb.. “While those can be great for simplicity’s sake, the fact is, those rules of thumb aren’t always realistic given our current circumstances. Or maybe those rules of thumb don’t take into account how big our goals really are,” said O’Connell. She said one of the big questions she likes to frame savings goals around is “What is it you really want?”
This took me aback. It’s not just short-term – like being able to make the car payment you want for your fun new car or having a little money left over for adventures once the rent check is out. It’s thinking five years plus.
O’Connell made this crystal clear, “Someone who wants to buy an apartment in a city like New York and take an annual one month sabbatical for international travel is going to need to save a lot more than someone living in a low cost of living area who wants to prioritize other things like homesteading.” I can hear my sister’s voice ringing in my head about the quality of life in Atlanta, versus mine in Los Angeles.
A pro tip from O’Connell: make it visual! The dream home off the beach with full glass windows and a goldendoodle running in the front? Screenshot it. Make it your background on your phone or desktop. “You can even print out a picture and wrap it around your cash and credit cards so that every time you go to make a purchase, you have a visual reminder of what you’re saving toward – forcing yourself to really consider what trade offs you’re willing to make or not make in the day to day as you make that journey,” she said.
The second of the big realizations: you have to take in the reality of your current financial circumstances. “If you’re at or close to a starter salary and you have a lot of student loan debt, chances are you won’t be able to pay your bills AND save up a full emergency fund AND max out your retirement accounts AND save for short-term goals like holidays, events and vacations AND save for longer-term goals like a downpayment or wedding all at the same time,” said O’Connell. Setting a small amount of money aside each week is the place to start. And it makes a big difference in creating a savings habit.
“When it comes to establishing smart savings behavior, it’s the habit of setting money aside that’s more important than the amount. You can always scale up your savings contributions as you’re more able,” said O’Connell.
So where should you start? She says tracking your money. O’Connell has written down every single dollar she has spent in an excel spreadsheet for years. She also tracks her net work, how much she owns versus what she owes. “Seeing where my money is going keeps me accountable to aligning my spending and savings with my goals,” she shared.
Once you’re tracking your money, you can start saving. And O’Connell recommends the tool of automation. Automating a certain amount of money to be transferred directly from your checking account to your savings account each week or month allows you to start having money in your savings without the stress or non-existent nails to prove it. Automation isn’t possible for everyone if you don’t have a consistent income, especially right now amid COVID-19, which leaves many people turning to getting as smart, frugal and saving as much as they can.
O’Connell has coined the saying ‘you can’t out-frugal your way to rich’. AKA, you can only cut back so much, like not going out for brunch, saving gas money for only important trips, and not splurging on clothes you don’t need. You need money coming in in order to really make meaningful progress toward your goals and have the money to save and invest. “Before investing in a new venture, I recommend taking inventory of your skills, knowledge and experience – all the things you do that have value or potential value to others. If you can take the time to identify places where your skills, knowledge, and experiences overlap with market needs, you can start thinking more critically about what investments might make sense for you,” said O’Connell.
At the end of the day, savings is a goal many have in mind to move towards financial freedom. To O’Connell, this means being able to afford the life you want on your terms. “That’s going to look different for absolutely everyone. The thing I wish I could tell everyone is to get rid of the idea that there is one singular way of constructing a successful life – ex. college, career, marriage, homeownership, 2 children, retirement,” she said. In short, that’s nonsense. “If you don’t want to own a home, you don’t have to own a home. You can build wealth in other ways. If you don’t want to get married or have kids, you don’t have to get married and have kids. You should build your financial plan around affording what YOU want. That’s financial freedom to me. The freedom to move toward the things you want. And the freedom to walk away from the things you don’t – for example toxic jobs, partners, living situations,” she shared.
The final say on savings: It’s not just about the money, it’s about what the money affords you. O’Connell stresses to get clear on what you want your money to afford you. The more specific, the better. You can use that as motivation to keep you accountable on whatever you’re working toward.