Learn how to move beyond saving and start building wealth with Minority Mindset’s savings fund challenge.
Saving money shouldn’t be a permanent sacrifice.
It isn’t easy to put your extra cash into savings, but it’s a responsibility that you need to take seriously if you want to build wealth. Emergencies happen to everyone, so you need to plan ahead and build some financial padding so you don’t lose everything when an emergency does come along.
Fortunately, saving money can be a temporary commitment. Once you have your savings fund in place, you can use your money for other things! Then, you can stop saving and start spending on things like investment seeds and personal goals.
Minority Mindset’s Savings Fund Challenge
Minority Mindset’s Savings Fund Challenge is a plan of action that helps you stop saving so you can start spending money as quickly as possible. It’s a blueprint for financial success that shows you:
- What percentage of your paycheck to save according to your living situation
- How much to save before you begin spending on investments seeds and personal items
- How much to put in the bank before you can stop saving altogether
In this article, we’ll show how to stop saving and start spending. You’ll discover:
- Why you should save money and where to save it
- How to build a short-term emergency savings
- What percentage of your paycheck should go toward your savings, spending, and investing
The Scary Truth About the State of Savings in America
Yes, there are some factors out of our control.
There are many economic factors like high inflation rates, rising costs of education, and stagnant wages that make the the current cost of living so high. However at the same time, many people are broke because they cash their paychecks and immediately start buying things they don’t need.
The majority of people burn through their paychecks by purchasing luxuries like new homes, expensive cars, fancy clothes, and expensive meals that they cannot afford.
There’s nothing wrong with buying nice things if you can afford them. But before you start eyeing that fancy car, you have to build some security. Otherwise, you end up begging for other people’s money when an emergency comes along.
Why Save Money?
Saving money isn’t easy, but it sets the foundation for the wealth and security you need in order to enjoy the good things life has to offer.
It’s important to protect yourself in case something happens that affects you financially. And let’s face it. Along the way, life happens. Things like:
- Car repairs
- Speeding tickets
- Phone or computer repairs
- Home maintenance
- Medical expenses
- Losing a job
Unexpected emergencies are part of life.
You never want to run into a situation where you don’t have cash if your car breaks down or something happens to your home. Or if you lose your job.
You need to protect yourself with an emergency fund, or as we like to call it, a “Savings Fund” Because when you least expect it – life happens – and you need to continue feeding your family and earning money.
When you put money in your savings account, you’re buying yourself a cushion. It will cut down on your stress and guarantee that you can continue working and putting food on the table if something unexpected happens.
Where to Save Your Money
Where will you keep this money? You’ll keep it in a bank account.
Now, you may have heard Jaspreet say that saving your money in the bank is a guaranteed route to being broke. It’s important to understand that putting money in a savings account won’t make you richer. In fact, the money you save will likely lose value.
But, you do want to put a limited amount of money into a savings account so you have easy access to cash in case of emergency.
So, banks are beneficial if you use them the right way.
Before we dive into your blueprint for financial success, here are two terms you want to know:
Allocating = “Assigning” or putting money into a certain fund
Fund = The category, or place, where you put your money (i.e., “savings fund,” “spending fund”)
Let’s get started by learning how to allocate your income.
How to Allocate Your Earnings
What happens when you get paid?
The majority of people go out and spend their paycheck on things that are nice and shiny, or on things they think they need. This is one of the reasons the majority of people are broke.
Building wealth begins with one step: Assign a job to every single dollar you earn before you get paid.
Every dollar you bring in needs to a purpose assigned to it before it ever hits your bank. You’re not going to cash your check and “go with the flow.” Instead, put your dollars to work for you in a way that builds wealth.
Every dollar that you earn will go into one of three places (“funds”):
- Savings fund (your savings and emergency fund)
- Investment fund
- Spending fund
If you’re used to living paycheck to paycheck, this will be a big change for you.
Making money decisions ahead of time and sticking with them is one of the key habits of rich people. So, when things get hard, remember that you’re training yourself to become wealthy. A bit of sacrifice today will make your savings a lot easier down the road.
The percentage of earnings you allocate toward saving, investing, and spending will change depending on your:
- Living situation
- Progress in your current financial plan
- Future financial goals
Keep reading to find out exactly how to allocate your earnings according to your individual situation.
First, let’s take a look at your short-term savings plan.
Step 1: Build a $2,000 Short-Term Savings Fund
If you’re just beginning to save, you want to put $2,000 into a savings fund before you begin allocating money anywhere else. This acts as small padding for minor crises that you’re almost sure to face during the course of a normal year.
Many people tell you to start with a $1,000 emergency fund. The problem with that number is that people have been advising the same amount for many decades. Since the price of things doubles every 20 years or so, $1,000 is no longer enough to cover small emergencies.
That’s why you want to begin with a $2,000 short-term savings fund.
What’s a Short-Term Savings Fund?
Your short-term emergency savings is a small amount of cash that helps you cover common emergencies, like:
- Car repairs
- Cell phone or laptop repairs
- Unplanned doctor visits
- Unexpected minor problems that can prevent you from earning money
How much of my paycheck should I put toward my short-term emergency fund?
Put aside every dollar possible until you reach $2,000.
Of course, you need to pay for living expenses first. But until you have your short-term savings in place, you need to cut your living expenses dramatically.
Here’s Why: If you have no money in your savings account, you are vulnerable to situations that can prevent you from working and generating income.
For example, if your car breaks down, you can’t get to work. If you have to see a doctor, the deductibles alone can eat into your rent or food money.
If you can’t get to work, eat, or pay rent – then an emergency becomes a disaster that can take months or years to recover from. You may not have earnings to allocate if you don’t protect yourself ahead of time.
Cut down on your expenses and freeze your spending completely until you have the security of a $2,000 savings fund. Sacrifice everything you can in order to bank those savings. This includes skipping anything other than the basics. Restaurants, bars, and coffeehouses aren’t necessities. The latest, greatest sale on clothes or electronics – not a necessity.
If $2,000 seems like a lot of money to save, then pick up a side job or work extra hours until you reach your goal.
It’s hard work and may take sacrifice, but funding your emergency savings is worth everything you give up to get there. Because when you face everyday problems like a car that won’t start or medication you need to stay healthy, you’ll be covered. You’ll be able to continue generating income for more savings, spending, and investing.
Plus, knowing that you’re covered relieves so much stress that you’ll be healthier and stronger because of it.
What about the bigger emergencies?
Your short-term savings won’t cover the big stuff. Once this account is funded, you’ll budget your money differently and begin working toward a full emergency savings fund. But you will be able to start spending and investing at this point.
In the next section, you’ll learn how to allocate and save money once your short-term savings is complete.
How to Build Your Full Savings Fund
Once you have your $2,000 short-term savings in place, you’re ready to start building a full savings fund that equals 6 months of living expenses. During this phase, you’ll also begin to spend money on investments that build wealth over time.
Once you have 6 months of living expenses in your savings fund, you’ll stop saving and put all your money toward investments and spending (so you can enjoy your money).
Calculate Your Monthly Living Expenses
Estimate your monthly living expenses by including:
- Rent or mortgage
- Car payments
- Gym membership
- Other subscriptions (Amazon, Netflix, Moviepass, etc.)
Now, add up your monthly expenses and multiply them by 6. Write that number down because that’s your goal for your full emergency fund.
What Percentage of Your Paycheck Should You Put Toward Savings?
The percent of earnings you allocate to your emergency fund depends on your life situation and income.
Below are guidelines on how to allocate your earnings according to your life situation, including:
- Young and single without children, mortgage, or your own business
- Young and single running your own business
- Parent with a family to support
There are a lot of variations when it comes to age, family, and lifestyle. If your situation isn’t included above, then read all 3 scenarios. You’ll get an idea of how money is allocated for different lifestyles and why it’s split up that way. Once you understand that, you can create your own variation.
1. People with No Children, Mortgage, or Other Major Expenses: Save Aggressively.
When you don’t have a family to provide for, a home to care for, or a business to run, you have a once-in-a-lifetime chance to save and invest aggressively.
Allocate 20% of every paycheck to your emergency savings fund until you have 6 months of living expenses in the bank.
If you’re in this category, you should live on half of what you earn. Your earnings should be allocated like this:
- 20% savings
- 30% investments
- 50% spending
If you’re young and still living with your parents, you should save even more aggressively. Also, be sure to base your 6 months of living expenses on the amount of money you will need to live on your own. This includes things like:
- Gas and Water
- Internet connection
- Household items
- Hair and skin care
- Cosmetics, if you use them
- Health and medical insurance and costs
- Fitness membership
2. Young Single People Running Their Own Business: Save Less and Invest More.
If you’re running your own business when you’re young and before you have a family to support, here’s how to allocate your earnings:
- 20%: Savings
- 30% or more: Invested into your own business
- 50%: Spending
This is just a general guideline. Notice that a good chunk of your income may need to be invested into the business you’re running.
(1) Many startups will require you to go all in, meaning you invest 100% of your earnings into your business during the early stages.
The financial planning we are talking about is geared for people who already have a steady, separate stream of income.
(2) When you are an entrepreneur starting your own business, you will very likely be required to make extreme financial sacrifices.
That’s because instead of earning a 5 – 10% return from traditional investments, you can get a much higher return by investing in your own business. In fact, it’s not unrealistic to receive a 100% or higher return from your own business.
If possible, cut your living expenses and allocate more of your earnings into your business.
There’s no limit to the amount of money you can make from investing in your business, so focus on growing your business before investing in traditional investments.
Make the most of being young and single.
The most important thing to understand when you’re young and single is that you really have to live below your means. Every dollar you set aside today will improve the quality of your life down the road.
3. Got kids? Parents with children to support should take it slow(er) but remain steady.
It’s a lot tougher to live on 50% of your earnings when you have children. Yet there’s also a greater sense of urgency because part of their well-being depends on your financial security.
When you’re supporting a family, allocate more towards spending so you can take care of your them. Here’s how to budget your earnings:
- 10% savings
- 15% investments
- 75% spending
You’re more likely to need your emergency fund when you have kids.
So when things are going smoothly, try to put away a bit extra to reach that 6-month savings goal.
If you’re married, try picking up a side hustle or considering a 2-income arrangement, even if it’s temporary.
When you have a family and an emergency comes up, like the loss of a job, the stress can be paralyzing if you don’t have a savings fund. This kind of stress can put you in a mindset of desperation and cause you to make bad decisions.
The last thing you want is to be looking for work when your mind is in a desperate mindset. Clients and customers can sense desperation, and it makes you less likely to get hired or sign on new clients.
So, even though it’s tougher to save money when you have children to support, push yourself to save at least 10% or your income. You may even consider picking up a side job or starting a low-cost business to build your emergency fund quicker.
It’s not easy, but getting your full emergency fund in place will change the quality your family’s life now and in the future.
Do the hard work.
When things get tough, remember that a bit of discipline now will go a long way down the road.
Building a full savings account might not happen quickly for you. It could even take a year or more. Keep building consistently, and eventually, you’ll reach your goals.
Minority Mindset’s Challenge: Stop Saving and Start Spending
Saving money shouldn’t be a lifelong habit. Once you have 6 months of living expenses in the bank, you’re done! You’ll can stop saving money because putting more than what you need into a savings account is a sure way to lose value and lose in the money game.
When you’re done saving and are ready to spend, you’ll allocate your income differently so you spend and invest what you earn. You can enjoy more things while building wealth for your future.
To learn more about the next phase of money management, you can read our eBook on money and investing for free when you sign up for our money & finance newsletter.
Got questions about your savings fund? Leave us a comment on the Minority Mindset YouTube Channel.