How To Save Money – 8 Places Your Money NEEDS To Go (To Become a MILLIONAIRE)
You know how it is, you get paid every single month and before you know it, the month passes by and you're thinking to yourself, where on earth has all my money gone 🤔.
The decision you make about where your money goes every single month is what separates people who live on a paycheck to paycheck basis compared to people who are either financially secure or working towards becoming financially independent.
Today, I want to share with you 8 places your money needs to go to on autopilot on a monthly basis. This decision is one that you should have made even before your money hits your bank account.
So today's topic is important because if you get this right and you're able to create these buckets for your money, I can pretty much guarantee that by following the simple approach of telling your money where to go, you can be someone who can gradually begin to work your way towards becoming a millionaire one day.
Even if your goal is not to become a millionaire, the things I'm going to be sharing with you today will help you move from where you are today, towards a place of financial security, and potentially financial independence.
I am going to make this really practical.
First, I'm going to share the 8 places I suggest that you send your money to every month when you get paid.
Then, I'm going to share the 5 key principles that will underlie why I've chosen those 8 places.
Finally, I want to end with a practical illustration for someone earning £30,000 per annum.
Let's keep it real – I'm going to walk you through from the gross income to the net income.
Then we're going to go step-by-step and deduct those specific percentages for how to save money monthly.
HOW TO SAVE MONEY EACH MONTH (8 Pots To Become a MILLIONAIRE)
Let's dive in now and talk budgeting and how to save money every single month as it hits your bank account 😃.
POT 1 – PENSION
CONTRIBUTION AIM – 10%
The first place your money should go every month should be to your pension.
This should happen before your money has hit your bank account. The beauty of paying money into your pensions and saving that way is that you're doing it from your gross income.
If you are somebody who works for an employer who matches your contributions into your pension, then this is literally free money, guys, and you should be all over it.
Our suggestion here is to aim for around 10% of your gross income being paid into your pension.
Although I've suggested 10%, I would say generally anything between 5% and 15% is considered a very good contribution to your pension particularly if your employer is also matching it.
If you run a business, let's say you have your business within a limited company.
One way that you can make contributions into your pension is directly from your company itself into your own pension but via a company scheme.
You'd need to set up a company pension scheme (e.g. with Vanguard) and make that contribution straight from there into an account under your name if you are a director of your own limited company.
This is fantastic because the money is coming out of your business (and not coming out of your own pocket).
It's also a tax-deductible expense for the business itself.
If you are somebody who does not run a company, but you're self-employed, you can make a pension contribution through a Self Invested Personal Pension (SIPP).
It is a type of pension account that helps you achieve the same outcome of saving money and getting back the tax that you might have paid if you are making that payment from your net income.
By the way, if your pensions are all over the place and you want them consolidated into one Pension Pot, then you should definitely check out PensionBee.
They consolidate all your pensions for you for free and managed them for you at a low fee.
Ok, so you've made a contribution from your pension…
We're now going to move on to you receiving your salary into your bank account and it would typically arrive in your current account.
From that current account, you now want to set up some automation (e.g. standing orders) for where you'd love your money to go on a monthly basis.
To keep up with the percentages, we're now going to allocate your entire NET income till it all adds up to 100%.
POT 2 – EMERGENCY FUND
CONTRIBUTION AIM – 5%
The second place your money should go should be towards you saving for an emergency fund.
I mention this because emergency funds are absolutely critical given the times we are living in.
We've all seen over the last year, how our lives have been changed drastically and the emergency fund (if you had one) would have come in very handy in such uncertain times.
So aim for an emergency fund of anything between 3 and 6 months worth of your monthly expenses put away.
The goal here is to keep this money as liquid as possible and keep it accessible in case that emergency shows up.
For example, if your boiler breaks down or your car has a flat tire, you are not having to rely on debt by using a credit card to pay for something but you're instead relying on that emergency fund.
So I'd suggest here aiming for around 5% of your net income as a contribution towards your Emergency Fund every month.
And once you've actually saved up the three to six months worth of expenses put away within your emergency fund…
what you then want to do is then take that 5%, which you'd ordinarily contribute towards your emergency fund and roll it into account number three, which is for you to make sure that you are investing into your stocks and shares ISA.
Check out our popular Budget For Life tool to help you budget your money practically and consistently.
POT 3 – STOCKS & SHARES ISA
CONTRIBUTION AIM – 15%
Aim to invest at least 15% of your net income into your stocks and shares ISA each month.
The goal here is to make investments that will support your future long term goals such as you working towards becoming financially independent or even becoming a millionaire one day.
I know 15% sounds like quite a high percentage for some people, I understand, because a lot of people struggle to even save 5% of their income.
But this is where having these percentages, which are by no means perfect, but a guide will help you begin to make the necessary changes around various aspects of your lifestyle in order for you to prioritize investing money to support your own future.
You'll notice that the first three accounts I've mentioned so far,
- Emergency Fund
- Stocks and Shares ISA
Have all been about paying yourself first.
So now we've looked after paying yourself the next thing we want to do is to now focus on your needs (things that you need in your life to get by).
POT 4 – NEEDS
CONTRIBUTION AIM – 50%
Account number four is for money to go automatically to another account designated for your needs.
It's absolutely important to be clear on what needs are vs what wants are in your life.
Your needs are your necessities, things such as you having money for your rent, or your mortgage, or for your insurance (protection is such an important part of this journey towards building wealth).
So things as having home insurance, critical illness insurance, life insurance, are important types of insurance that you need to potentially explore in your life depending on what your personal circumstances are.
Then, of course, let's not forget food because you need food to survive and get by every day.
Other things such as your holiday, whether you're spending on having a takeaway, or getting an Uber are not your needs, by the way!
POT 5 – DEBT PAYOFF
CONTRIBUTION AIM – 10%
The fifth place your money should go should be towards debt payoff, and I'm assuming you might have some debt in your life.
So if you do have some debt, then I'd suggest allocating 10% of your net income every month towards paying off some debts.
Now, the thing about paying off debt is that there are two core methods for doing this, a
- Debt Snowball
- Debt Avalanche
We made a previous video explaining the merits of these two methods:
The thing about a debt snowball (where you focus on the smallest amount of debt you've got first and clearing that before you move on to the next one), is that it's quite good for keeping you motivated.
I have previously suggested prioritising the Debt Avalanche, which is where you are paying off the most expensive debt as it's the most efficient way for you to pay off your debt.
In many cases, and this has been shown by way of research, the Debt Snowball is more effective especially if you're somebody who has lots of different types of debt.
POT 6 – FUN & WANTS
CONTRIBUTION AIM – 5%
The sixth place your money should go is towards the fun and the things that you might class as your wants.
These are things such as you going away on holiday, getting takeaway, paying for Uber, things like that and I'd suggest allocating 5% of your net income towards this area.
If you're somebody who does not have any debts, as I mentioned in a previous section where you're paying down debt with 10%, then you might want to allocate a bit more towards this pot for your fun.
Or you might want to use some of that money and do a bit more investing, and you can gradually tweak as you go along.
Now, this bit about fun is absolutely important.
I've seen this in my personal life, as a family man, as a business owner, having fun is so important as I'm sure you would agree.
If you've got, 9 to 5 job, it can be quite challenging working all those hours every single week without actually carving out some time for some fun.
So make it a key feature of your budget to allocate at least 5% of your budget every single month towards your spending on things that you really like and things that you think add value to your life.
I, for example, love just having time away in a different environment.
So a key feature in our budget is trying to book some time away just to change my environment, have some fun and gain a whole new perspective on life.
POT 7 – GIVING
CONTRIBUTION AIM – 10%
The seventh place your money should go is to go towards giving.
I notice this is one pot that not too many people expect to be budgeted for, but I think that putting money towards giving is such an important part of doing life.
We should not just think of our money as just being all about us, i.e. we just spend or allocate all the money we make on just our own lives and that's it.
There are people out there that need our support, whether it be family members, or whether it be strangers.
Just having a section of your budget dedicated to helping other people is really a key part of what we refer to as creating Financial Joy in our lives.
Using some money that we earn for causes that we're passionate about and supporting people who really need it is a big part of what makes us happy.
It's also what keeps us working even harder because we know that part of the money we make is there to support other people on their journeys as well.
So although I have allocated 10% here as a guide, it could be quite different for you.
You might be somebody who says,
“well, actually, at this very moment, I'm only really able to allocate a fixed amount, maybe £50 a month because I'm trying to pay off some expensive debts in my life.”
Or you could be that person who says,
“well, actually, I make enough in my life and I can do way more than 10%.”
We know people who do way more than 10% allowance and it works for them.
So do what works for you, but the key thing is to do it from the heart and see giving as not a chore, but a key part of what gives meaning to your life.
Check out our popular Budget For Life tool to help you budget your money practically and consistently.
POT 8 – GROWTH & RISK
CONTRIBUTION AIM – 5%
The eighth place for your money to go is towards your growth and risk pots.
Now, this is the pot of money that you are putting away for experimental reasons for exploring things that you might find interesting.
This could be a side hustle, a business idea, a new type of investment that you really want to explore for learning to see how your money might grow by experimenting in that specific type of investment, etc.
What I recommend here is for you to allocate 5% of your net income towards your growth and risk pot.
A key part of what I highly recommend you do with this pot of money is to learn to productize yourself.
LEARN TO PRODUCTISE YOURSELF
I heard Naval Ravikant explained this idea of productizing yourself in a really interesting way.
It means taking who you are and taking your abilities, and productizing it as a way for you to generate more money.
And the way he explained it was to break down the two words, “productive” and “yourself”.
The word productize has what's known as leverage.
And leverage means that you are essentially doing something that can multiply your efforts.
When you have some inputs going in leverage is what multiplies that such that it becomes two times, three times, five times the effort that you've put in.
A good example of leverage is creating media on the internet e.g. this blog post or a video on our YouTube channel.
Creating a video has the potential to reach thousands of people and potentially even millions of people over a period of time compared to if I was making a video with you sitting with me in a room.
That particular piece of content would only reach you or perhaps just a handful of people, by me teaching it face to face in a room.
So media, in effect acts as a form of leverage.
The word “Yourself” is important because you possess various bits of specialized knowledge and abilities that can be packaged in a really unique way in order for you to generate a bit more income.
So aside from just using that 5% that I suggested for perhaps exploring a side investment, and so on.
I would really focus on this idea of productizing yourself because it's absolutely powerful.
In fact, it's the new way that people who do not have a lot of money ordinarily can actually go about using today's technology to create something that then goes on to make them a lot of money in the future.
HOW TO SAVE MONEY: 5 Key Principles To Become a Millionaire
Now that I've explained those 8 different places that your money should go, I want to spend a couple of minutes just explaining the core principles that underlie them.
First Principle: Protection
By that I mean, really looking after your money, not just earning money and seeing it just disappear, but actually protecting that wealth.
And the more you can do it with little bits of money, the more you'll be able to do it with a lot of money as you start to become wealthy over time.
A key element of that protection include things such as having an emergency fund or you paying for various bits of insurance as I covered when I talked about needs.
Second Principle: Increase
The second principle is the principle of increase, which is why I made reference to having a growth or risk of money that you can use to explore various types of ideas.
“Increase” is a really important principle to make a part of your life and it is made it more achievable if you set yourself very specific goals around increasing various areas of your money life, such as your savings rate, for example, or your annual income and things like that.
Third Principle: Priority
The third principle is the principle of priority.
The first three things I suggested in this post was for you to focus on Paying Yourself Self.
This is such an important principle as you progress on this journey of building true wealth over time.
Fourth Principle: Creativity
By this, I mean creativity when it comes to solving problems.
It's actually this idea of solving problems that then enables us to create value and generate extra income from what we do.
Fifth Principle: Generous Living
This is one that many people ignore, I can absolutely guarantee that if you make generous living a big part of your values (i.e. who you are and what you believe in), it will give you so much more purpose.
In short, this idea of building wealth is not just for yourself, but also for the better outcome of other people as well.
HOW TO SAVE MONEY: Practical Illustration For £30K
I mentioned previously that I would give you an illustration for someone who earns £30,000. Here we go:
You can see that I've got their gross salary above and on the second line, you can see the pension contribution of 10% being £3000 towards their pension.
Doing this means they save tax as they're paying into the pension gross.
You can see various key amounts then being deducted for tax, national insurance and their annual allowance then being added back to get us to what is their net income for the year.
That net income in that example of £21,662, is then divided by 12 to get us down to their monthly net income of £1805.
It's from that amount of £1,805, that we then start to apply these other percentages that I've been talking about for the various pots.
- 5% was the emergency fund
- 15% towards your Stocks and Shares ISA
- 50% towards your needs, this is for necessities and protection. Protecting yourself and protecting the wealth that you are building.
- 10% going towards debt payoff and the principle there is debt freedom and building wealth.
- 10% to charity, driven by the principle that is all about living a generous life.
- 5%, allocated to increase/risk, which comes to £90 pounds per month in that example, driven by the principle of increase in what you have, and also learning on the journey.
All that adds to 100% and then that brings us down to zero with nothing left to allocate from that net income.
But like I said earlier, this is just an illustration and will change over time as you earn more or adjust your lifestyle.
HOW TO SAVE MONEY: Conclusion
I absolutely believe that if you're somebody who follows this plan of allocating your net income starting with the gross towards your pension, and then these various percentages I've suggested to these 8 pots, you will find over time you'll build a really solid foundation for building wealth.
As your income starts to rise over time, provided you really stick to these percentages and focus on simplifying your lifestyle over time, you will not suffer from that lifestyle creep that most people have.
Instead, your expenses will say mostly flat while your income increases, creating for you a much larger buffer.
It's that buffer that you can then begin to redirect towards those key areas of investments and learning and assets that earn you a recurring income and gradually buy you back your freedom.
All this will further help you build wealth as you work towards achieving financial independence and potentially even to become a millionaire one day.
By the way, if you love travelling, check out a Fun Reel that we created to summarise the 8 points on how to save on our Instagram (@thehumblepenny):
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I'd love to hear from you in the comments re how to save money. How do you currently budget your money monthly by pot?
As always, in all things, be thankful and seek joy!