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3 questions you should ask before you save …

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You work hard for your money and you know that you should be saving more of it. Developing a determined attitude towards savings is the first step which will get you on the road to financial freedom. So how do you start?

Here are some essential questions that you should ask yourself:

How much should I save?

It depends on what you are saving for. It is also relative to how much you earn. As much as possible is the first answer. However, understanding that the cost of living gets tougher every year, it becomes more and more difficult to keep up with your savings. You need to start out by contracting with yourself to save a percentage every month without compromise. This amount should rather be a percentage of your income instead of an amount. This will keep you honest with your savings drive as you will be increasing your savings as your income increases. If you are living at home with the folks, then you should be saving a lot more than if you are living on your own. You should work out your actual cost of living, see how you can manage the expenses. Stay away from debt and leave behind as much as possible for savings. Get the cash account for emergencies in place first and then onto the investments for the longer term.

How long do I want to save for?

You should save all the time. Short term savings targets for things like deposits on cars, holidays.Long term savings for your retirement. Your time horizon determines how much you can afford to invest in more risky assets such as shares. You see, shares tend to outperform other assets over time. They do not perform in straight lines. They are volatile which means that their valuations can move up and down in a very short space of time. This volatility smooths out in the performance of shares over a longer time horizon. So, if you can invest for the long term, then shares become a more appropriate option. Generally speaking this should be a period of 10 years or longer.

Do I have cash for unforeseen expenses?

A sound financial plan has a provision for emergencies. This should be a cash savings account which is easily accessible and earns some interest. Ideally, a money market account with your local bank. The amount saved should cover you for 6 times your monthly income need. Why? Well, if you have need to access cash for an unforeseen expense then this account is available instead of you having to cash in your investments which are set for the longer term. It buys you peace of mind that even if you lose your job you have some time find a new one.


This article first appeared on 702 : 3 questions you should ask before you save …


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