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A Simple Technique to Begin Savings from Scratch

Knowing how to save money is an important part of financial independence

A Simple Technique to Begin Savings from Scratch

Saving can be a hassle sometimes, especially if you feel like you earn only enough money to spend on your daily needs. I know it might be the easiest thing to do, but even if you consider your salary to be small, you should be saving a small part of your money. 

Imagine if you lose your job tomorrow. What would happen? Do you have enough resources to maintain yourself for the next 6 months? Or would your initial reaction be to panic because you have no idea what to do without your next salary? Having an emergency fund is important to avoid specifically this kind of situation.

This time I will explain a simple, but effective strategy for saving your money and starting your path to financial freedom. Here's how to do it. 

First Step: Begin Small

The first thing you need to do is make the decision. Make sure that you understand what this commitment means to you: a small step towards financial freedom. Once you decide to start saving money, choose a small portion of your salary and commit to saving it. 

This amount could be 15%, 10%, 5% or 1% of your salary. It doesn't matter how low the amount is, just pick a sum that will be comfortable for you right now. It's better not to ask yourself if it is really an amount worth saving because you might start second-guessing yourself, and you will certainly feel tempted not to change anything. Rather, focus on making this a constant effort until you have made it a habit. 

If your bank allows you to set up an automatic savings amount, it's even better because you won't have to struggle to do it every month. This makes the saving effortless as long as you understand that saving is a priority.

Second Step: Scale Up

Now that you have made it a habit, or if your bank has made it a habit for you, it's time to scale it up. If you begin with 1% of your salary, try increasing it to 5%, or at least 2% if you are struggling with your finances. 

You might feel like this amount is too big a strain on your budget, or that you might be giving up on something that you need right now. In most cases, this won't be true, and you'll be fine by replacing old habits with newer, cheaper ones. And you don't have to cut back on anything indefinitely, either. 

You can try rotating certain guilty pleasures, like not buying clothes for one month, and not going to restaurants the month after.  This way, you are not giving up on anything. Instead, you are just decreasing the frequency of some expenses.

Third Step: Compound

While you are getting used to saving your money, it's a nice time to learn how compound interest works. Even small sums, saved for a long time, will compound into a large capital, eventually. That is why at the beginning it doesn't really matter how small you start. 

Even saving an amount as small as $50 per month could add up to a small fortune after 20 years. You won't go very far if you stick to a savings account, though, which is why it is crucial to understand more complex investments and creating your own investment portfolio.  

Fourth Step: Enjoy

Now you have made saving a habit and your saved capital is earning interest and getting bigger every month. When you get to this stage, remember the questions I asked when you started. 

Try to compare what you would feel if you lost your job tomorrow. Struggling without a paycheck is no longer a problem for you because you have prepared for this kind of emergency with your rainy day fund. This is the feeling of financial freedom that comes with having plans for any occasion of your life. You know that you are prepared for situations out of your control and even when others would struggle, you have the financial security that you need to keep things in order for months even, before finding a job. 

You have taken another important step towards financial freedom. Congratulations!

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