At times, it is compelling to mindlessly spend your hard-earned money without a thought for the future. It’s not an uncommon feeling because we have a primal urge to want new things and experiences, which can be expensive. But the consequences of reckless spending can be dire if the outflows exceed inflows. Especially in light of the downbeat economic outlook, the case for savings makes itself.
So, saving for the future becomes crucial — whether that is two days from now or two decades. Savings can help break the paycheck-to-paycheck cycle, allow for bigger purchases down the line, and enable retirement planning. Regardless of the size of the income, people who can differentiate between wants and needs can create a good budget and adhere to it. Over time, as savings grow, financial security becomes a reality. Although saving does not necessarily connote compromises, it does take some lifestyle adjustments. Here are tried-and-tested ways you can do it strategically and methodically.
Calculating the “real” income
The simplest method is to focus on headline earnings. This number represents the total income or salary a person earns in any given period. But it is more important to take stock of the “real” hourly rate. Two seemingly similar salary or income earners in identical positions may earn vastly different hourly rates.
The general notion is that, longer the working hours, the smaller the hourly rates and vice versa — even when the overall salary or income is the same. Here is a simple formula to work it out: Money earned/ hours spent = hourly rate. It is best to deduct income tax, cost of commute, discretionary spending, etc. to get realistic results. This will help you understand the opportunity costs, enabling you to effectively recognize areas where you can save.
Savings by understanding opportunity costs
Being mindful when spending is a great way to start saving. Also, understanding opportunity cost — what you give up to buy something that you want — can help you be mindful of how you are decreasing spending and increasing savings. Opportunity cost also means that money spent somewhere cannot be utilized elsewhere. Everything comes with an opportunity cost — including the day-to-day decisions such as taking a cab or choosing to commute via bus, eating out vs. dining at home, etc.
Understanding opportunity costs and choosing smarter alternatives can help you put the best foot forward. It takes merely 30 seconds to increase savings with this method. Step one involves reevaluating a spending decision and looking at cost-effective alternatives before the actual expense is incurred. This also means understanding that this money could be used for something other than the current purchase and thinking in terms of the potential trade-offs being made.
Step two involves recalling the last time a similar product or service was bought and evaluating the consequences — good or bad — that followed. Did the purchase bring feelings of joy or thrill, or guilt and disappointment? Such self-posed questions will help you break the spending cycles and build savings instead.
Food consumption and waste management
Food waste is a common and seemingly unavoidable problem plaguing many households. Contrary to popular opinion, it is not restaurants or grocery stores that are responsible for the most food waste; it is the households. According to a UN report, a person, on average, wastes 95kgs of food per year in the UAE. This is the status quo across the Middle East. Countries such as Bahrain, Iraq, the KSA, and Syria have a greater waste footprint, their numbers averaging between 132-100 kgs per year per person.
There are several ways to avoid food wastage. Even a simple “3+1 approach” can help reduce food waste by at least a third. This approach posits using what’s readily available in the kitchen/fridge to cook a meal one day of the week. The rationale is that food wastage commonly occurs due to people forgetting what is in the stock and allowing it to waste away. This practice also ensures that people are more thoughtful about their consumption and increases resourcefulness (and creativity) in the kitchen.
Such small and consistent changes can translate to big savings cumulatively. And once you develop a taste for savings, it becomes less of an ordeal and more of a habit. To know more on regular savings plans, get in touch with us at firstname.lastname@example.org.