How do you save money for trading?

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Introduction

For many people, trading is their dream job. However, not only is it difficult to be a profitable trader, but it also requires capital to start with. And for some, that is a hard obstacle to get around. The starting capital needed is a subjective matter. It varies due to different goals, different trading strategies, brokers requirements, etc. However, what is clear is that a good saving strategy can help you reach that starting capital.

From a basic standpoint, there are two ways you could save more money for your starting capital. Spend less, or earn more. In this article, we are not going to look at ways to earn more money. Instead, we will be focusing more on how to spend less, and explore various money-saving strategies. I have split this article into several different chapters, starting from some key strategic questions you should be asking yourself, and some key actions you need to be taking, and ending with some more practical tips on how to save more money and refrain from going on an unnecessary spending spree.

How much should you be saving?

A common question raised is “how much should I be saving?”. While it’s certainly hard to answer, and your saving capabilities are an individual matter, we can take a look at how much people generally tend to save. For this, let’s take a glance at the savings rates in the US and the EU. A savings rate is basically how much you save, divided by how much you earn. The following are the savings rates in the US and the EU since 2000:

Personal saving rate in the US:

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Personal saving rate in the EU:

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As we can see, the savings rate in the US is lower than that in the EU. However, as a general tendency, it is around 8-10% on average. This can give you a reference point for how much you want to be saving at a minimum. As a general rule of thumb, you probably want to be saving at least 10% of your personal disposable income. Of course, the more, the better. In the next paragraphs, we will be taking a look at the best ways to reach and go beyond that 10% savings rate.

Own – Owe = Net Worth

The first step towards making a sound saving strategy is knowing how much you’re worth. You can practically calculate this by knowing both your assets and liabilities. Or, what you own and what you owe. Why is this important? If you have a low net worth and a lot of debt, it may be wise to start by paying off those short term debts. Especially so if interest payments on them are rather high and are eating up a large portion of your savings. A good example would be credit card debt, as the interest rate on such debt is usually very high.

However, it’s not always wise to prioritize paying off all of your debt. For instance, long term UK student loans are rather large and require that you only start paying it off once you reach a certain income level. Plus, the interest rate on such debt is usually low. Many times it’s not feasible to pay off such debt and better not to prioritize it, as it does not eat up your savings too much.

Figure out your net income and budget

Once you know your net worth and set your priorities regarding debt right, it’s time to calculate your net earnings and your budget. Your net earnings are simply your after-tax income. So, if you’re earning $30,000 a year and your effective tax rate is 25%, you’re left with a net income of $22,500, which is $1,875 monthly. After that, list all your expenses throughout the year. These are some of the expenses you want to list:

  • Rent or mortgage payments, if any
  • Car payments, if any
  • Transportation costs (including gas, tolls, tickets, car maintenance, and insurance)
  • Utility bills
  • Cable, internet, phone services
  • Healthcare
  • Food and groceries
  • Other items you need to maintain your household
  • Clothing
  • Gym and similar memberships
  • Debt payments (such as loans, credit card debt, etc.)
  • Gifts
  • Leisure and entertainment
  • Any large future purchases (if it’s an irregular item, you may want to split it into a couple of years)
  • Other obligations and expenses

Once you’ve figured out your net earnings and expenses, calculate how much you save. That is, in absolute terms, and in % terms of your net income. Compare that with your goals and expectations. Is it more than the minimum 10% savings rate we’ve set previously? In any case, there is probably room for improvement, and below are some ways you can save up more.

Expenses = Needs + Wants

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After you’ve evaluated your current state regarding income and expenses, it’s time to split those expenses into needs and wants. Your needs are basic necessities such as food, transportation, healthcare, etc. While your wants are something that’s nice to have, but what you could also do without. This includes things like restaurant meals, extra non-work clothing, etc.

Once you’ve split your expenses into wants vs needs, it’s time to analyze them and see if there are any purchases that are overdone or completely unnecessary. For instance, you may find out that you are spending far too much on clothing or restaurants. If so, adjust your budget accordingly. Also, try to decide, how much of those wants can you do without? Would you be okay spending 75% of your “wants” budget instead of the 100% you currently spend? Maybe 50%? Try to set a separate budget for your wants, and keep to it.

Create a separate bank account

So, now you have a plan on how much you can save. While that’s a big step forward, that alone is often not enough to make you save the money you’ve planned to save. It’s very easy to slip back into your old spending habits and make a big dent into your savings. For that reason, you not only need discipline but also use some smart ways to lock those funds from yourself.

A good way to do that is to open a separate bank account and set up automatic payments from your “regular job” paycheck. That way, you will basically help yourself save more by not even seeing that small part of your income you automatically send to another account. The amount you send can simply be your income times your desired minimum savings rate. For example, if you are earning $1,875 monthly, and want to save at least 10%, you will be sending $187.5 to this separate bank account, every month.

Keep track of your spending

If you’re serious about trading, then you also need to be serious about saving for that initial capital. For that, it’s a good idea to regularly keep track of your spending habits. So, spend some quality time with your money every month. Analyze your current state of finances. See if there are any tweaks to your spending you could do. For instance, maybe you will find that you have spent less than expected this month. That can give you some breathing room for the next month. Map out your larger future purchases accordingly.

Do not go all cheap

It’s best not to go all cheap and save on things such as quality food. For example, while vegetables and quality food are more expensive than fast food, they will add up to your future health and your future healthcare costs. So, it is actually in your own best interest to not over save on such necessities.

Be conscious of the state of your body and mind

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According to a study by the University of Minnesota’s Carlson School of Management, hunger not only makes us crave food but also makes us spend more even on non-food items. The study found that hungry mall shoppers who have identified themselves as being hungry tend to spend, on average, 64% more than those mall shoppers who have identified themselves as not hungry. So, have a nice meal next time before you go shopping.

Another key area of focus should be your state of mind or your emotional well being. It’s very common to go on a big shopping spree to compensate for a bad mood or negative event in your life. Thus, you should try and always be conscious about how you feel and your mood swings. If you feel like you’ve had a bad day, try to be conscious of it and find alternative ways of dealing with it, rather than going shopping and buying unnecessary things. (This skill will also, later on, help you in trading, as mood swings can account for a large portion of your losses.) A good way to do so is to keep a journal. It can be as simple as recording your mood twice a day. If your mood is low, you will be aware of that and more likely to refrain from unnecessary shopping activities.

Shop with a strategy in mind

Shopping with a strategy is another good way of curbing your bad spending habits. Especially so if you are an impulsive person. Discipline is key here. For instance, if you are feeling excited about a new item you want to purchase, make it a strategy to delay it for 24 hours. This will save you a lot of unnecessary impulsive purchases.

Another strategy to use is to simply make barriers to shopping. An example could be deleting your billing information from websites such as amazon.com, and avoiding one-click purchase agreements at all costs. Make it harder to purchase online, for your own good. You might just find that you will feel it’s not worth the hassle to buy something you don’t really need.

Some additional money-saving tips

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  • Empty your pockets every day, and start collecting that hard cash. After you’ve collected a considerable amount, take it and deposit it into your separate savings account for trading, rather than your main account.
  • Prepare for grocery shopping: make a list of items you need to buy before going shopping and keep to it. Avoid getting any unnecessary items that are outside of your grocery list.
  • Map out major purchases. Feel like your bedroom furniture needs refurbishing? Don’t just go shopping for new furniture the next day. Explore the current prices and wait for good deals instead. Similarly, refrain from buying shoes during the “new collection!” phase. Wait for the end of the winter to buy winter shoes at a discount for next year.
  • Order smaller servings at restaurants. If you’re going out to eat, it’s a good idea to have a snack before you go, and order smaller servings at restaurants. This can save you a great deal of money.
  • Make your own gifts. The cost of a wedding gift or a birthday gift can be extremely high. Instead, take the DIY route and try to make something yourself.
  • Cancel unnecessary subscriptions. It is wise to go through your subscriptions every month and see if there are any that you don’t really need anymore or aren’t using at all. Many times you will find that you have an unnecessary subscription running for no good reason.
  • Manage your utility spending. Make it a habit to turn off all unnecessary lights, install water-saving showerheads.
  • Review your cable and internet plans. Are there unnecessary premium channels you’re not using? Switch to a simpler plan. Also, bundle cable and internet – many times it’s cheaper to do so.
  • Switch to a more appropriate mobile plan. It might be the case that you are not using all the internet and the minutes you are paying for.

Conclusion

Saving money for capital for trading is a good skill to learn that will not only help you save in general but will also teach you discipline which is absolutely key when it comes to trading. We have reviewed the key steps you need to take to start saving and also gave you some additional practical tips on how to curb your unnecessary spending. Hopefully, this will help you save on a more conscious and strategic level than before, and get you to the initial capital for your trading account to get you started.