How to Start Saving to Become Independent

Co-authored by Ara Oghoorian, CPA

Last Updated: June 4, 2021 References

Achieving financial and personal independence is a great feeling, and is manageable with some hard work and careful budgeting. You will have to assess everything you earn and everything you spend, and figure out areas you can make savings. Once you are regularly saving money you will find it becomes a habit and the money will accumulate quicker than you expect. With some solid savings behind you, and an informed and in control approach to your finances, you will be able to stand on your own two feet.

Part 1

Part 1 of 3:

Taking Control of Your Finances

1
Assess your incomings. The first step to taking control of your finances and saving to become independent is assessing how much money you have coming in. It’s crucial that you fully understand your financial situation if you want to achieve independence. Go through you recent bank statements and work out your regular sources of income and the amount you expect to come in each month.
- Your incomings might include a pay check, a benefits check, a pension payment, or a college loan.
- Include every known and ongoing source of income you have.
2
Determine your outgoings. Once you have worked out precisely how much money you have coming in and when, switch your attention to your outgoings. To start with, write down all regular payments that you can predict and know will continue. These might include your cell phone contract, household bills, rent or mortgage payments, insurance payments, and college fees.
- Once you have all the predictable and known costs, try to add in all the more discretionary spending.
- This will include things like going to the movies, buying clothes and eating out.
- You might find it helpful to divide all of these costs into categories, such as household bills, living costs, financial products (e.g. insurance, or loan repayments), transport costs, and leisure activities.^{[1]
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3
Track your regular spending. You can use bank statements to work out how much money you spent on various things in the previous month. If, however, you want to get a more immediate and dynamic picture of your daily spending, consider using an app that tracks what you spend.
- You can use apps that require you to fill in some quick details each time you spend money.
- Other apps are connected directly to your credit or debit card and record every time you use them.
- Some of these apps also have budgeting tool and can analyse your spending and present it to you in graphs.
- You should always be wary of providing personal financial information to third parties to avoid scams.^{[2]
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4
Compare incomings and outgoings. Now you have a clearer picture of what money you have coming in and what it gets spent on, you need to carry out a comparison of the two. This will enable you to see if you tend to spend more than you have coming in. You can use a spreadsheet on a computer, or write it out by hand. Be sure you double-check all your sums at the start to avoid any confusion.
- Having all your incomings and outgoings laid out in front of you will help you get a fuller picture of your budget, and see places where you can make savings.
- You can use online tool to analyse your spending and present the information to you in a form that is easy to read and digest.^{[3]
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5
Look for significant savings. Often some of our biggest costs are associated with things like household bills, rent, insurance and transport. These are essential things that you can’t really do without, but that doesn’t mean that you can’t find ways to make some savings. For household bills, look online to see if you can find a better deal. Shopping around is the best way to save money on things like electricity and internet bills.
- Look for special offers and try to take advantage of good offers, but always find a deal that is the most cost effective for your needs.
- For example, if you use a lot of data on your cell phone, but rarely make calls, look for a plan that reflects your habits.
- Always be sure that you are getting a better deal. Work out the full cost of the contract, not just the introductory rate, and compare it to what you are paying now.
- Sometimes phoning up directly can be a good way to negotiate a better deal with your cell phone provider.^{[4]
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6
Cut costs on smaller items. After trying to make savings on the big recurring costs, it’s time to look at smaller savings you can make to your regular spending. Look through what you spent in the previous few months and work out where you can make some cuts or alterations. Maybe you will limit yourself to going to the movies once a month rather than twice, or perhaps you will try to buy all your books second-hand.
- You want to make changes that are sustainable so you keep saving money in the long-term.
- Don’t deny yourself everything. Complete self-denial could result in an uncharacteristic financial splurge which ruins your budgeting.^{[5]
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People’s financial situation can change quickly and unexpectedly, so it’s important that you try to maintain some flexibility in your budget. The more time you have spent studying your incoming and outgoings, the easier you will find it to make alterations when a specific event arises.

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Part 2

Part 2 of 3:

Dealing With Debts

1
Prioritise your debts. Most people have at least some form of debt, and the payments on this can eat up a large part of your budget. While you always have to pay your debts, you can prioritise them to ensure that you are getting the most for your money and not risking any extra charges. Start by working out which are priority debts, namely those which have the harshest penalties for missed payments.
- High priority debts include your mortgage or rent, income and other government taxes, utility bills and hire purchase agreements.
- Always meet the minimum payments for debts, and try to work towards paying off debts with the highest interest rates first.
- If you can pay off expensive debt, it will make it easier for you to save money in the long-term.^{[6]
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2
Consider different repayment schedules. If you’re struggling with debt, you should think about any possible alterations you can make to your repayment schedules. If you are paying back more each month than you can afford, it might be possible for you to renegotiate the loan so you pay back less each time, but you are paying back for a longer. This may work out as more expensive as you will have more interest to pay off, but it can be a good option if you are unable to make your payments.
- Get some independent financial advice to discuss your possible options.
- Don’t be tempted to take out another loan to help you pay off an existing loan. This can lead to a spiral of indebtedness that it is hard to get out of.
- Beware of companies offering to restructure your debt. There are reputable companies that do this, but it can be very expensive and increase rather than decrease your debt burden.
3
Pay back above the minimum rate. Another way to take charge of your debts is to pay above the minimum rate. You may choose to do this if have some extra money and you want to take advantage of it to reduce your debt burden. This will be most beneficial if you are paying high interest rates and the minimum payments and not making an impact on your overall indebtedness.
- Always talk to your loan holder first, as some loan may prohibit you from paying above a certain rate.
- Often loans have early repayment penalties which may make it more expensive to pay off the loan ahead of schedule.^{[7]
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- Just paying back the minimum amount on a relatively modest credit card debt could mean it takes years to pay off.^{[8]
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4
Use savings to pay debts. A good rule of thumb for getting to grips with your finances and moving towards financial independence is using savings to pay off your debt. This is normally the right thing to do financially because the amount you can earn on your savings is typically less than you are charged for your debt.
- Having ongoing debt repayments can make it very hard to break free and achieve financial independence.
- If you have assessed your situation and think a debt burden is a big barrier for you, consider using savings to pay it down and give yourself some financial breathing space.^{[9]
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Part 3

Part 3 of 3:

Saving and Investing

1
Open a savings account. Once you have done all the hard work finding ways to save money, it’s important that you make the most of these savings. Open some kind of savings account, with as high an interest rate as you can find, and set up a direct debit every month. Include the debit in your monthly budget so you are prepared for it.
- Consider opening an account with your local credit union.^{[10]
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- Having a direct debit is a great way to save money without really thinking about it.
- The money is transferred automatically, and you’ll be surprised how quickly it begins to accumulate.
- Your employer may have a payroll savings scheme whereby a deduction from your pay slip goes straight to a savings account.^{[11]
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2
Make saving a habit. Having a savings account and a direct debit is a great way to make saving a habit that you incorporate into your budget. You can also make saving money or shopping more frugally part of your everyday life. Check the prices of different items in shops, and take a moment to think if you could get the same thing cheaper somewhere else.
- Just being conscious and aware of prices, and the money you could potentially save, will help you to make saving money a habit.
- Keep an eye out for special offers, and take advantage of them when they suit your needs.
- The sooner you get into the habit of saving money and budgeting the closer you are to achieving financial independence.
- Try to save 20% of your income.^{[12]
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  Ara Oghoorian, CPA
  Certified Financial Planner & Accountant
  
  Expert Interview. 11 March 2020.}
- Make putting money into your savings account the first thing you do after you get paid so you're less likely to spend that extra money.^{[13]
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  Ara Oghoorian, CPA
  Certified Financial Planner & Accountant
  
  Expert Interview. 11 March 2020.}
3
Start saving for retirement. To really get a grip on your finances and ensure you will be supported in the future, it’s sensible to start planning for retirement early. Social security payments on their own will generally only cover about 40% of an average worker’s salary after he retires. It is estimated that you will need around 70% of your salary to live comfortably in retirement, so it’s important to start saving.^{[14]
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US Social Security Administration
Independent U.S. government agency that administers Social Security and related information

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- Investigate whether your employer has a pension plan, and make sure you are taking advantages of any employer contributions. If your employer doesn’t have a plan suggest the company starts one.
- You can save for yourself by opening an Individual Retirement Account. You can put in up to $5,500 a year into this account, or more if you are 50 or over.
- These accounts provide tax efficient and easy ways to save for retirement.
- You can arrange for an amount to be paid automatically from your checking or savings account.
4
Consider frugal investments. If you find that you are saving successfully and have managed to put aside a good amount of money, you might want to try and get a better return than the interest you are earning. Some low-risk and modest investments can help you get a better return and make your savings work harder for you. Government bonds are a well-known example of a relatively low risk investment.^{[15]
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- There is little capital risk with the bonds, but there is risk that the money will have less buying power when the bond matures as a result of inflation.^{[16]
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- You can look up all the different options and yields online.^{[17]
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- If you are interested in making some investments, consider talking to a financial adviser about your options.^{[18]
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- Be sure that you keep saving in the meantime and don’t take any risks with money that could threaten your financial independence.
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Expert Q&A

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How much of my income should I be saving?

Ara Oghoorian, CPA
Certified Financial Planner & Accountant
Ara Oghoorian is a Certified Financial Accountant (CFA), Certified Financial Planner (CFP), a Certified Public Accountant (CPA), and the Founder of ACap Advisors & Accountants, a boutique wealth management and full-service accounting firm based in Los Angeles, California. With over 26 years of experience in the financial industry, Ara founded ACap Asset Management in 2009. He has previously worked with the Federal Reserve Bank of San Francisco, the U.S. Department of the Treasury, and the Ministry of Finance and Economy in the Republic of Armenia. Ara has a BS in Accounting and Finance from San Francisco State University, is a Commissioned Bank Examiner through the Federal Reserve Board of Governors, holds the Chartered Financial Analyst designation, is a Certified Financial Planner™ practitioner, has a Certified Public Accountant license, is an Enrolled Agent, and holds the Series 65 license.

Ara Oghoorian, CPA

Certified Financial Planner & Accountant

Expert Answer

Try to save at least 20 percent of your gross income, or your income before taxes, and strive to keep increasing that percentage. As your pay increases or you get bonuses, try to push that 20 percent higher.

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If you get a raise or bonus at work, try to save that extra money even though it might be tempting to inflate your lifestyle.^{[19]
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Ara Oghoorian, CPA
Certified Financial Planner & Accountant

Expert Interview. 11 March 2020.}

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