Saving strategies and loan management

How to start saving

Saving money is such a simple concept, yet so many of us struggle to actually do it on a regular basis. We like the idea of having plenty of money tucked away for a rainy day, but achieving our end goal is a slow process, so we tend to choose more instant gratification instead — like spending our spare cash on something we can enjoy today.

Saving essentially means changing that mindset and prioritizing your long-term goals. Whether you’re looking to buy a house, get ready for retirement, or enjoy a dream vacation, it will take time to put aside the money you’ll need — and you’ll need to focus on those goals, no matter how far away they may be — while making small sacrifices today.

Saving tends to be more difficult if you begin it later on in life. If you don’t start putting money away until you’re in your 30s, for instance, it is a harder habit to adopt than if you started the day you got your first job, not least because you will likely have more financial commitments in your 30s than you did earlier on. But don’t let that put you off.

Saving habits

Here are some common and effective steps you can follow, or habits you can adopt, that will help you become a better saver:

Start small
If you’re already on a tight budget, starting small with your savings is a great way to get into the habit of putting money away on a regular basis. Even if you’re saving just $10 a month, which may not seem like a lot, it all adds up in the end — and you can increase that amount when you’re in a better situation to build your savings faster.

Keep savings separate
Don’t leave the money you’re saving in your primary bank account. Put it into a separate account — preferable a dedicated savings account with a higher rate of interest — where it is more difficult to access. This will significantly decrease the likelihood of that money being spent on a whim, and it will make it easier to keep track of how much you’ve saved over time.

This will also help you manage the money in your main account more effectively. You can plan your budget based on what’s left after your savings are taken out.

Set up regular payments
Rather than relying on yourself to manually transfer money into your savings account, set up a regular payment from your primary account if possible. This will help you treat your savings payments more like another bill that must be paid, and reduce the chances of you skipping savings payments so that you can spend your spare cash instead.

Set a savings goal
For most of us, saving is much easier when we have a clear goal in mind. This not only motivates us and gives us something to work toward, but it also helps us visualize where we’re at along the way. You will be less likely to dip into your savings if you can see that they are slowly but surely building up to your end goal.

Pay off debts as quickly as possible
It may sound counterintuitive, but putting as much money as you can into outstanding debt and paying it off as quickly as possible will help you become a more effective saver in the long run. Less of your money will be spent on things like credit cards and loans, and more of it can go into your savings account, which will help you achieve your end goal much faster.

Furthermore, a lot of debts come with a high rate of interest, so the quicker you pay them off, the less you’ll have to spend on them in the long run.

What is a saving strategy?

A saving strategy brings together all the tips we’ve outlined above into a blueprint for achieving your personal savings goals. Putting together a strategy will help make your saving more consistent and keep you on track. Here’s how to get started:

1. Create a personal budget
A personal budget takes into account all your incomings and outgoings and helps you understand where your money is going — and how much you have left over once all your bills are paid. It is critical that you put together a budget before you start saving so that you can be realistic about how much money you can put aside.

We have an AAG Academy guide dedicated to personal budgets and financial plans, which is a great place to start for anyone who has never created a budget before.

2. Set your savings goals
Once you know how much you can save each week or each month, it is time to start thinking about what you want to save for. This doesn’t have to be one thing; it can be a mix of short- and long-term savings goals, such as going on vacation, buying a vehicle, putting down a deposit on a new home, or planning for retirement.

When thinking about your goals, try to ensure that they are SMART:

• Specific
• Measurable
• Achievable
• Realistic
• Time-bound

For instance, rather than saying you want to “save money for emergencies,” determine how much you would need in an emergency situation. If you lost your job today, how much will you need to pay your bills and stay afloat for two or three months until you can find another position? You can then determine how long you’re going to give yourself to save that amount.

By making your goals specific, it will be easier to keep track of your progress, which in turn will help motivate you to continue the good work.

3. Decide how much to allocate to each goal
Now that you’ve decided on your savings goals, you can think about how much of your spare income you would like to allocate to each one. Naturally, short-term savings goals will be more of a priority since you have less time to achieve them. Long-term goals, like saving for retirement, not only give you more time, but tend to be much bigger than short-term ones.

It may be that when you get to this step, you realize that the timescales you assigned to each goal in step two aren’t realistic. That’s okay; it’s all part of the process, and you’re unlikely to get it right the first time. Go back and think about whether you want to allocate more time to a certain goal, or reduce how much you put into another one.

4. Decide where to keep your savings
Remember, it’s a bad idea to keep your savings in your main bank account where they can be easily spent. So, think about where you want to keep them before you start saving. For short-term goals, your best option is likely a savings account where your money is separate but still accessible when you need it.

For long-term goals, you may want to look at other savings options that give you the opportunity to make your money work for you while you have no need for it — or make it more difficult to access so that you cannot easily dip into it whenever you feel like it. A pension is a great solution if you’re saving for retirement, and there are plenty of others.

See our AAG Academy guide to investing for more ideas, and think about speaking to a financial advisor who can recommend the right savings options based on your own situation.

How to calculate an emergency fund

We touched upon it briefly above, but it is worth emphasizing that an emergency fund is critical for everyone, no matter what your current financial situation may be. Almost all of us can experience issues out of our control that may impact our financial situation. They may be as simple as a broken down car that needs repair, or as complicated as losing a job.

These things can be much easier to deal with if you have funds put aside that you can fall back on. So, how do you calculate how much you should have in your emergency fund? It is recommended that you start with at least $500, which should be enough to replace a punctured tire, buy groceries for several weeks, or pay another unforeseen bill.

If you are able to, however, you should bolster your emergency fund to cover a lot more than that. To get a better idea of how much you should be putting aside, we recommend using an emergency fund calculator — like this one from NerdWallet — that will tell you exactly how much you need based on your own financial circumstances.

Retirement strategy

Assuming you don’t need to worry about your retirement strategy until you’re older is a common and costly mistake. The sooner you start thinking about and planning for your retirement, the more you will be able to save toward it, and the better off you will be later on in life. If possible, you should start saving for retirement as soon as you start earning.

In some countries, many jobs come with a pension as standard, and contributions from your salary are automatically deducted and added to your pension pot — alongside matching contributions from your employer if you’re lucky. You may also be entitled to a state pension, though for many of us, this alone isn’t quite enough to enjoy a comfortable retirement.

If you do not get a pension with your job, you can set one up yourself, either through a bank or a pension provider. Along with your emergency fund, a pension should be a priority investment for everyone — one that is established before any other investment strategy. It is the best way to all but ensure that funds will be available to you when you stop working.

It is recommended that at least 15% of your annual income is put aside for your pension. That’s assuming that you start saving for retirement by the time you’re 30, and you plan to retire in your mid-60s. If you start saving later than that, or you hope to retire a little earlier, you’ll need to think about increasing that percentage.

If possible, you may want to contribute more than 15% of your salary even if you start saving early. Not only is a pension a great investment, which can bring excellent tax benefits in many countries, particularly for higher earners, but it means your later years will be all the more comfortable. You may even be able to retire earlier than the average worker.

Your personal pension strategy will depend on your own financial circumstances, and it is a great idea to get advice from a bank or a financial advisor, both of which will be able to help you put together a pension plan that is tailored to your own situation and goals.

Insurance

Although insurance may seem like just another expense that you could do without it, you’ll be incredibly grateful that you have it should you ever need it. And there are certain things that should be insured as a priority, such as your vehicle, your home (and your belongings within it), and your life itself.

Types of insurance

Fortunately, there are plenty of insurance types to choose from to cover almost every need. Here are five of the most important that should be considered:

Life insurance
Life insurance is critical, particularly for those who have dependents, like children and a spouse who rely on your income. It ensures that should the unthinkable happen and you are no longer around to provide for your loved ones, they will receive a payout. Depending on where you live, there are typically two types of life insurance to choose from.

One of these, which is usually the most common, is whole life insurance, which covers you on an ongoing basis until the day you die. You can usually access this money by withdrawing funds from it at any time should you need to, or you can take an early payout. There’s also term life insurance, which covers you for a certain number of years, like 10, 20, or 30 years.

Health insurance
If you do not get free healthcare in your home country, health or medical insurance is essential. This may come with your job, but if not, it can be acquired from an insurance provider. This not only covers you for the cost of any healthcare you may need — including doctors visits and hospital procedures — but also for medication.

Income protection insurance
Income protection insurance is particularly critical for those who run their own business or are self-employed. It ensures that if for whatever reason you are unable to work and earn a living, perhaps because of an accident or prolonged sickness, you will still be paid. The amount you receive depends on your plan and how much you pay into it on a regular basis.

Vehicle insurance
Vehicle insurance is self-explanatory, and in most countries, it is a legal requirement for anyone who owns and drives a vehicle. Depending on your insurance plan, this may cover you for costs incurred from an accident or collision that wasn’t your fault, accidents or collisions that were your fault, and theft or vandalism.

Some vehicle insurance policies also cover legal expenses, so if someone sues you as a result of a collision, you won’t have to worry about the entire cost yourself.

Homeowner’s and contents insurance
If you own a home, homeowner’s insurance is a must. Depending on the type of policy you take out, this can cover the cost of damage to your property, as well as the belongings within it, as the result of fire, hurricanes, vandalism, and other disasters. Some policies will even cover your belongings “off-premises,” like when you take your laptop on a trip, for instance.

It is important to note that in some countries, homeowner’s insurance, which is often referred to as buildings insurance, and contents insurance are two separate things, so you may need two different policies to protect your property itself and your possessions within it.

Loans and borrowing credit

In some cases, saving up for something you need, which usually takes time, simply isn’t a viable option, so you may need to take out a loan instead. This will provide you with the funds you need almost immediately, and you’ll be able to pay back what you owe gradually over a period of time — ideally at a favorable interest rate.

Although it is best to avoid borrowing for things that aren’t truly necessary since you’ll always end up having to pay back more than you borrowed, there may be times when it’s your only option. If you need a vehicle to get to work, for example, or you have to pay for essential repairs, borrowing the money may be the only way to access the cash you need quickly.

Types of loans

Depending on what you need money for, there are usually two types to choose from, which are secured and unsecured loans. 

Secured loans
Secured loans are backed by some form of collateral, such as a property or vehicle, which may be at risk should you fall behind on your payments. However, secured loans typically have lower interest rates.

Unsecured loans
Unsecured loans are not backed by anything, which means lenders cannot easily take away an asset in the event that you default. Therefore, unsecured loans rely solely on your credit history, so they are usually much smaller and typically have higher interest rates.

If you are unsure what type of loan you should take out, it may be worth speaking to a financial advisor who will be able to recommend the most suitable option based on your personal circumstances and financial situation.

Loan amortization

Before taking out a loan, you may want to take some time to think about loan amortization. This is the process of scheduling out the amount of money you borrow into equal repayments over a certain period of time, such as one year or five years. A portion of this payment will go toward what you’ve borrowed, and the rest will cover the interest.

It is worth noting that loan amortization determines the minimum monthly payment required by your lender, but it does not prevent borrowers from making larger or additional payments to pay off the loan faster. Any additional amount you pay usually goes toward paying off the money you borrowed, which means in the long run, you’ll pay less in interest.

Almost all loans that come with fixed monthly payments are amortized loans. That includes auto loans, personal loans, and fixed-rate mortgages. Common unamortized loans, with which the repayment amount varies depending on how much is owed and may not have an end date, include things like credit cards and interest-only mortgages.

Lenders will calculate loan amortization for you during the application process, however, it’s a good idea to go over some rough estimates beforehand to give yourself an idea of how much you will need to set aside each month — and whether it’s affordable. This may help you decide how long you’re going to give yourself to pay back what you owe.

Loan calculators

Don’t worry if you’re not so good at math since there are countless online loan calculators that can help you with this process. We recommend using the one provided by NerdWallet, which lets you enter the loan amount, the loan period, and the interest rate to calculate the repayment figure. Lots of other free options are available with a quick Google search.

Credit reports and scores

Before thinking about applying for a loan or any other type of credit, it is advisable that you obtain your credit report or credit score. A credit report details your history of borrowing and managing debt, including the types of credit you’ve obtained, your payment history, and any defaults. Your credit score is a figure determined by this information.

Your credit report is used by lenders to determine how much of a risk it would be to lend you money. If you have a good credit report, you should be able to obtain most forms of credit and lower interest rates. Conversely, if you have a bad report, you may be declined some forms or credit, and those that are offered to you may come with higher interest rates.

You may also be declined credit simply because you have no credit history at all, usually because you have never borrowed money, paid bills, or had a bank account in the past. If that’s the case, it is unlikely lenders will offer you large sums of money since they are unable to determine how much of a risk you may be.

You can build a credit history by opening a bank account if you don’t already have one and using it to manage any existing bills well. You can also take out small forms of credit, such as a cellphone contract or a credit card, and ensure that payments are made on time and in full. If you have a credit card, it’s a great idea to pay off the whole balance every month.

You can view your credit report yourself by using a service like Experian or Equifax if you live in the United States, or a similar service in other countries.

How to improve your credit score

If you already have credit history but it is not particularly good and you’re struggling to obtain other forms of credit, you’ll need to work on improving your credit score. The most effective ways to do this are:

Get to know your debt
Not everyone keeps a close eye on their finances, so the first step toward improving your credit score is to refamiliarize yourself with your debt. We touched on this earlier in this guide, but the main objectives are to determine how much you owe, who you owe it to, how much you should be paying, and when you should be paying it.

One of the quickest ways to do this is to obtain a copy of your credit report, which will detail all of your outstanding debts. You can then contact any creditors to find out how much your repayments are and when payments should be made if necessary.

Keep up with repayments
Ensure that any existing debts you hold are paid on time every month. This includes credit cards, loan and mortgage repayments, and other obligations like cellphone contracts. Falling behind on payments will lower your credit score very quickly.

Consider consolidating debts
If you are struggling to keep track of your debts, you may want to consider consolidating them. This is when you take out a loan to pay off everything you owe so that you are left with just one form of credit and only one payment to deal with. It can be a great option, particularly if you can get it with a lower interest rate, assuming your credit score is strong enough.

Use less of your available credit
Just because your credit card has a $1,000 limit, it doesn’t mean you have to use it all. Using less of the credit available to you is a great way to show creditors that you can be responsible with your money and you don’t just spend it because you have it. This will help bump up your credit score and increase your chances of obtaining other forms of credit in the future.

Make fewer ‘hard’ credit requests
When you apply for certain types of credit, lenders will perform a “hard” inquiry on your credit report. Hard inquiries show up on your report, which means they can be seen by other lenders, even if your application for credit is denied. Too many inquiries on your report doesn’t look good and can lower your overall credit score.

Making fewer applications for credit reduces the number of hard inquiries and helps improve your report. If you suspect that you will be declined credit because of your history and credit score, it’s best to avoid applying at all. Fortunately, “soft” inquiries, which include things like viewing your credit report yourself, do not show up.

References

• Eight ways to start saving successfully
• Smart goals
• Make savings plan
• 8 best strategies for retirement
• 4 types of insurance everyone needs
• What difference between loan and line credit
• How to build credit and credit history
• How to improve your credit score