Tips to Help You Get Started With Saving Today
How much money do you have in savings? If you’re like many people in the U.S., the answer might be “not much.” A 2016 survey from the Federal Reserve revealed that 44% of respondents didn’t have enough money saved to cover a $400 emergency.
When asked what they’d do to pay for a $400 emergency, some said they’d use a credit card, while others said they’d borrow money from friends or family. Some said they just wouldn’t pay at all.
While the average savings rate seems to paint a grim picture of people’s financial lives, the Federal Reserve survey found that wasn’t necessarily the case. Nearly 30% of respondents said they were living comfortably on their earnings, and another 40% described themselves as doing OK financially.
It might be the case that some people are struggling to make ends meet and have little leftover for savings at the end of the pay period. In other cases, the lack of savings has more to do with poor spending habits and a lack of budgeting than not making enough money.
If it feels like you’re spending all your money as soon as you make it, keep reading to learn how to get started saving money so you can watch your bank account grow.
Know Where Your Money Is Going
One of the most important tips to start saving money each month is to figure out why you’ve been unable to save in the past. If you’re not paying attention to your spending, money often has a way of vanishing.
Try tracking your spending for a least a week, if not a month. Paying attention to what you’re buying and how much you’re spending in certain categories can give you an idea of where to cut back.
You have a few options when it comes to methods to track your spending. They include:
- Record every purchase you make in a small notebook that you always carry with you.
- Collect your receipts throughout the day, then enter in each purchase on a spreadsheet in the evening.
- Pay for everything with a credit or debit card, then review your statement at the end of the month.
- Use an app to track and record your spending.
Keep track of every penny you spend over the course of the week or month. Don’t worry about keeping track of regular expenses at this point, such as your mortgage or rent payment or any other bills. You’ll focus on them when it’s time to put together your budget.
Remember to be honest with yourself when recording your spending and purchases. Although you might feel tempted to leave out certain purchases to make it seem like you’re spending less, pretending those expenses or purchases don’t exist won’t help you when it comes time to finding ways to save more money.
Put Together a Budget
Once you know how you’re spending your money each month, it’s time to put together a budget to understand how your expenses compare to what you earn. You’ll need the following information to prepare your budget:
- Your total monthly income (after taxes)
- Your monthly fixed expenses (mortgage/rent, utility bills, loan payments, etc.)
- Quarterly, semi-annual or annual expenses (car insurance, registration renewals, co-pays for doctor’s visits)
- Spending in non-fixed categories (transportation, groceries, clothing, entertainment, etc.)
Figuring out your monthly income can be a snap if you get a regular paycheck. If you’re a freelancer or have an uneven source of income, it can be more challenging to figure out what amount to use as your monthly income.
One option is to look at the amount you made the year before and divide that by 12. Another option is to add up what you’ve earned over the past few months and divide that by the number of months. For example, if you made $3,000 in April, $4,000 in May, $6,000 in June and $4,000 in July, add those up, then divide by four to get your average income — in this case, it comes to $4,250.
Once you’ve tallied up your monthly income, the next step is to tally up your monthly expenses. Add up your fixed expenses for the month, as well as the non-fixed expenses. If you have quarterly or other irregularly occurring expenses, divide those up to figure out what they cost monthly. For example, an annual subscription that costs $120 works out to be $10 per month. A car insurance payment that costs $200 every six months works out to be $33.33 per month.
Add up every expense, then compare it to your monthly income. In an ideal situation, the amount of your income will be more than or equal to your expenses. In a less than ideal situation, your income will be less than your expenses.
Find Ways to Cut Back
Whether your income matches your expenses or is less than your expenses, if your goal is to save money, you’ll need to find ways to trim your spending each month. When it comes to cutting your expenses, you can make several small changes or cut back in a large way by making one or two big changes. Big changes you can make include:
- Moving to a home with a lower monthly rent or lower utility bills
- Selling a car if you’re in a multi-car home and don’t need more than one vehicle
- Refinancing your mortgage or other debt to get a lower monthly payment — this can mean spending more money in the long run
Depending on what you’re spending your money on each month, there are many ways to make smaller changes to your spending habits to increase the amount of money you’re able to put into savings. You could:
- Cancel subscription services you don’t use. Decide which ones you like the best, then nix the rest. For example, you might choose Netflix over Hulu, Amazon Prime over Spotify, and so on.
- Switch your cable or phone plan to a cheaper option, with fewer bells and whistles — do you really need 200 channels or unlimited data each month?
- Eat more meals at home or pack your lunch for work more often, rather than going out to a restaurant or ordering take-out.
- Buy less clothing.
- Watch movies at home rather than at the movie theater, or limit your trips to the cinema.
- Trim your grocery bills and avoid waste by only buying food you know you’ll cook and eat.
- Find cheaper alternatives for things you often buy, such as the store-brand of your favorite cereal, less expensive makeup or non-designer clothing.
- Carpool with a friend or co-worker to reduce your auto expenses.
- Quit the gym and work out at home, or join a less expensive one.
- Reduce your cooling or heating bills by keeping your home warmer in the summer and cooler in the winter.
- Give yourself a required waiting period, such as 24 hours or a week, before any non-essential purchase. You might find that you buy a lot less if you have to wait a day or so before making a purchase.
Set Target Amounts for Your Budget
Having an idea of how much you should be saving, how much you should be putting towards your necessities, and what you can spend on non-essentials can help you see what areas need the most trimming.
One of the simplest ways to figure out how much to spend in each category is to create three general categories. The 50/30/20 rule, for example, is often recommended to people looking to start budgeting.
The rule is simple. Following it, you spend:
- 50% of your after-tax income on necessities, such as housing, utilities, healthcare and your car or another form of transportation.
- 30% of your after-tax income on wants, such as going out, buying clothing, travel and hobbies.
- 20% of your after-tax income on savings and debt payments.
You can adjust the ratio based on your needs. For example, if you live in an area with a low cost of living, you might find you don’t spend anywhere near 50% of your income on housing and other needs. In that case, you can funnel some of that money towards savings.
Conversely, if you start saving from scratch or have a lot of debt, you might consider spending less than 30 percent of your income on wants and funneling some of that money over towards debt payments or boosting your savings.
Set Goals for Saving Money
One of the best tips for saving more money is to set specific goals. Saving money is easier when you know why you’re saving it. Otherwise, it just feels as if you’re hoarding money in your bank account. Depending on your current financial situation and goals, you might start putting money into multiple accounts. When you’re trying to save, it helps to think about your short-term and long-term goals.
Short-term goals can include:
- An emergency fund. How much you should aim to set aside for an emergency depends on your other financial goals, your income and your overall job security. If you’re in a two-income household, you might be able to have a smaller emergency fund than someone who’s the sole earner. If your job is relatively stable and secure, you might be able to have a smaller emergency fund than someone who freelances or works in an uncertain market.
- A down payment. If you want to buy a home or car soon, you need to start saving. How much you need to save depends on the size of the purchase, but the more you put down, the better the loan you’re offered.
- Life events savings. Whether you want to get married or fund the trip of a lifetime, having savings specifically for that purpose will help you avoid going into debt to cover the costs.
Short-term savings goals are typically any goals you plan to reach within a few years. Some savings goals might need a much longer lead time — it could be something you spend decades saving for. Saving for retirement is an example of a long-term savings goal. Setting money aside to cover college and other education-related expenses for your children is another example of a long-term savings goal.
Savings Options for Short-Term Goals
Knowing what you’re saving for and how much you can save each month are just the first steps towards saving more. You also want to understand what your options are for saving money.
When you’re saving for a short-term goal, you want to keep your money relatively liquid, or easy to access. You also want to protect that money, so that there’s no chance that it will lose value.
A regular savings account is often ideal for a short-term goal, such as saving for a vacation or a down payment. Another option is to open a certificate of deposit. CDs often have slightly higher interest rates than savings accounts. The trade-off is that you agree to keep your money in the CD for a set period, usually anywhere from a few months to several years.
Savings Options for Long-Term Goals
When you’re saving for a long-term goal, you usually won’t need the money until much later. While you can use a savings account for a long-term goal, other options might provide a better rate of return. If you’re saving for retirement, you might consider contributing to a 401(k) or another plan offered by your employer. Another option is to open an IRA at your local bank to set aside money for retirement.
Pay Yourself First
Changing habits can be difficult, which is one of the reasons so many people have trouble switching from a spending mindset to a saving mentality. One way to make sure your money ends up in savings rather than spent is to avoid giving yourself the chance to spend it.
Paying yourself first means depositing money into your savings account as soon as you get paid. You can also set up an automatic transfer so a certain amount of money goes from checking to savings after each paycheck. Automating your savings and not giving yourself an excuse to spend what you should be saving will help you break the “spend it all” cycle.
Five Tips for Saving Money When Getting Started Seems Impossible
If you’re still struggling to save after making a budget and figuring out where to cut back on spending, all is not lost. You might just need a little extra push to get started. Try one or all of these five quick tips to jumpstart your savings:
- Start small. Sometimes, baby steps pay off in the long run. If saving 10 to 20 percent of your monthly income feels like too much, start with just one percent. The next month, increase that to two percent, and so on.
- Save when you “save.” If you expected to spend $75 on a new pair of shoes but got a coupon for $25 off, put the $25 into a savings account. Do this every time you get a discount.
- Go on a cash diet. Pay for everything with cash for a month or two to avoid over-spending with your credit or debit card. If you have money left at the end of the month, deposit it into a savings account.
- Visualize your goals. Remembering what you’re saving for and why you are saving for it can encourage you to skip the spending. Ask yourself, “Why is saving money important to me right now?” and go from there.
- Save your coins. If you regularly end up with pockets or a purse full of coins, collect them in a jar. Once the jar is full, bring it to your bank and deposit the coins into an account.
Even if you’ve never saved before, it’s never too late to start. Learn more about our savings account options and start planning for your future now.