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How to save money in 8 steps
Create a realistic savings plan that empowers you to achieve your financial goals.
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Despite your best efforts and intentions, sometimes bills pile up, emergencies happen and it can feel impossible to save enough to make a difference. Thankfully, with some tweaks to your finances and the help of a few tools, building up your savings doesn’t need to be painful. Here’s how to save money in eight steps.
Step 1: Set a savings goal
Whether it’s an emergency fund, a summer backpacking across Europe or a down payment on a house, you probably have an idea of the financial goals you want to achieve. Write down all those goals — both small and large — and estimate how much you need to save to reach them.
Once you’ve arrived at a lump sum, determine how long it will take to save that amount depending on your income. For example, if you plan to save $10,000 to take a vacation within the next two years, then you should save about $416 per month. This amount could be a bit less, thanks to compound interest, but it’s better to run a bit over than a bit under.
Step 2: Create a budget
Learning how to budget and stick to it is one of the best things you can do for your finances. Not only does it help you figure out how much you can set aside in your savings account each month, but it’ll help make sure you don’t end up with overdue bills that hurt your credit and turn into debt.
Follow these steps to start your own budget.
- Calculate your income. From your salary and investments to side jobs or child support, work out how much money you earn each week.
- Calculate your expenses. Look through recent bank and credit card statements to see how much you spend each week — think groceries, rent or mortgage payments, gas, credit card payments, electricity, entertainment and more. Add new expenses to your list as they pop up.
If you have any money left over, congrats! You’re spending less than you earn. Use the excess money to fund your savings goals. If you’re over budget, this next step may come in handy.
Want to automate this process? Use a budgeting app to calculate, track and manage your expenses.
Step 3: Cut out excess spending
When it comes to saving, every little bit counts. Even if you only shave off an extra $50 a month from your spending, that’s $600 more you have a year to put toward your goals.
With that in mind, review your expenses to see if there are any you can live without. You don’t have to give up that $5 latte if it makes you happy, but your budget may be riddled with other purchases you don’t use or enjoy. For example, do you have any gym memberships, monthly subscription boxes, or a Hulu or Disney+ subscription you hardly ever use? Even necessary costs, like groceries, can be tightened up a bit by switching brands or watching for sales.
Step 4: Identify which type of savings account you need
To get the maximum annual percentage yield (APY), you need to set up the right account. There are several types of savings accounts, but the two main options are:
|Traditional savings accounts||Online savings accounts|
|Works best for|
Step 5: Open a savings account
Once you’ve decided which savings account type is right for you, it’s time to compare your options and choose one. If you’re looking for a high-yield savings account with zero fees, look at online savings accounts as opposed to ones at traditional brick-and-mortar banks. Online and digital banks tend to be more competitive than traditional banks because they don’t have to deal with the costs of keeping branches open.
Step 6: Automate your savings
Reach your goals even faster by putting your savings on autopilot. Most banks let you set up recurring deposits from your checking to your savings account each month. That way your money is out of sight, out of mind. There are also money saving apps that will automatically round up your spare change and move money into savings for you. Automated tools like Digit will even analyze your bank accounts and move extra money to savings when you can afford it.
Step 7: Create a savings plan
A savings plan is the process of nailing down exactly how you’ll save enough money to reach your goals. Here are some common plans you can use to boost your savings.
- 52-week challenge. With this challenge, you save $1 in week one, $2 in week two, $3 in week three, and so on until you save $52 in week 52. In the end, you’ll have saved $1,378 in one year.
- $5 trick. If you use cash regularly, you can use this trick where you save every $5 you receive. If you don’t use cash, you can aim to save $5 each time you do a specific task, like go out for coffee or run to Target.
- 30-day rule. Having trouble getting your spending under control? Try waiting 30 days before making a purchase. Often, you’ll find that if you wait to buy something, that urge will dissipate and you’ll save money.
- Spending freeze. For one week, tell yourself you won’t buy anything outside of standard bills and groceries. No dining out. No online shopping. No coffee runs.
- Pantry challenge. If you make weekly trips to the grocery store, skip one week a month and focus on eating up items in your pantry or freezer. Then, take that week’s worth of grocery money and move it to savings!
- Spare change challenge. Banks like Ally and Chime will round-up your debit card purchases each time you buy something and sweep the spare change into savings. If you use cash, do it the old-fashioned way and dump your spare change into a piggy bank.
Step 8. Check your progress regularly
Checking in on your savings progress has several benefits — you’ll be able to spot any suspicious charges on your bank accounts, you’ll know if you’re on track to meet your goal or if you need to adjust, you’ll get a confidence boost from seeing how much you’ve saved and you may come across new ways to save. For example, you may could:
- Sell things you don’t use. Examine your living space and gather all the things you haven’t touched in a year. Have a garage sale or list them on a site like Craigslist — and then send that money to your savings account.
- Cut down on entertainment costs. Try to limit yourself to one TV subscription service and decide ahead of time how much you’re willing to spend — and then stick to it. Host movie nights at home instead of going to the theater or skip trivia at the bar in lieu of a game night with your friends at home.
- Do some basic energy efficiency installation around your home. This includes changing light bulbs, updating your heating and cooling systems if possible and putting sticky notes up if you need to remind yourself to turn off light switches and unplug laptops at night.
Are you self-employed or freelancing?
Decide on a portion of earnings that you’d like to manually deposit into a savings account each month — and make sure you stick with it.
How to save in 5 steps
How do I stick to a savings plan?
Many of us start out with plenty of ambition and the best of intentions, but within a couple of weeks our carefully crafted savings plan has fallen by the wayside. However, there are a few key things you can do to ensure that you stick to your plan.
- Tell your family and friends. You’re far less likely to just give up on your dreams if you’ve shared them with someone else, and you’re likely to get extra motivation if your commitment starts to waver. Plus, you might even have some friends who are trying to save too.
- Check with your bank. Your bank might be able to help you manage your accounts. You could set up an automatic savings plan that takes money from your checking to deposit to your savings. Or a bank could offer accounts with a high APY with compound interest to help your money earn more money while you save.
10 savings tips for the future
You can plan to retire. You can plan for tax season. You can even plan for death — but you can’t plan for everything. You can, however, take steps to prepare yourself for the unexpected so you don’t get permanently knocked down when you hit an obstacle. A few ways to do that are to:
- Work on your credit score. High credit scores allow you to take advantage of the lowest interest rates when it’s time to make a large purchase. This can save you tens of thousands over the life of a 30-year loan. If your credit score is low, look into credit repair options.
- Start planning for retirement. It takes decades to save up enough for retirement, and if you start too late, you could end up in major financial trouble when you’re older.
- Get a good life insurance policy. Get a policy that isn’t tied to your employer — if you stop working for them down the line, you could be paying into the policy for nothing. Also, know the difference between a term life insurance policy and whole life insurance policy.
- Adjust your tax withholding. While getting a big tax refund sounds fun, it’s typically a sign that you’re paying the IRS more than you owe. Review your W-4 to make sure you’re claiming all of the allowances you’re entitled to. Then, move that extra money each month to savings.
- Get financial advice. Getting the right kind of financial advice can help you achieve your financial goals, make the most of your money, avoid expensive mistakes and protect your assets — whether that’s through a robo-advisor or financial planner.
- Have an emergency fund. Unexpected medical bills, losing your job, a house fire, a last-minute plane ticket to see a sick relative — there are endless potential emergencies that could crop up. Make sure you have enough to cover these emergencies. Three to six months is recommended, but the most important thing is that you save what you can.
- Avoid taking on more debt. Small amounts of debt are unavoidable — like a mortgage or student loans. Once debt starts piling up, though, it can be hard to dig yourself out. Avoid going deeper into debt by deciding not to take that personal loan to go on a vacation, for example.
- Make extra loan payments. Make more than the minimum monthly payments on your personal loans, credit cards and home loans. Since interest is calculated based on your daily amount, the faster you can reduce your principal, the less you have to pay.
- Make sure you have health insurance. The cost of health care in the US is astronomical, and a simple ER visit can cost thousands. If you’re having trouble avoiding premiums, look into government assistance in your state.
- Watch out when paying with credit. Credit cards often have interest rates of 15% to 30% — not including late fees if you miss a payment. If you’re racking up credit card debt, consider using the card for emergencies only and using cash or debit for daily purchases.
Invest your money
While there’s a degree of risk involved, making smart investments can help you grow your money significantly. For example, you could:
- Automate your investments. Similar to savings, you can set up automatic payments and have a portion of every paycheck invested for you. This is a great way to build your nest egg without having to do much work on your part.
- Invest in real estate. If you have a second home or large apartment, you can generate passive income by renting all or part of it out.
- Invest in a business. Starting a business allows you to be your own boss and gives you the freedom to implement ideas that will generate profit. You can also invest in someone else’s business if you don’t want to start your own.
- Invest in yourself. Increase your own market value by going back to school or attending classes that allow you to increase your potential future earnings.
Compare savings accounts
Saving can be difficult, especially when you think about how much it costs to make a big purchase or even retire. However, taking small steps to stash money away in a savings account every month can start to add up to major savings after a few years. If you make smart financial decisions and turn budgeting and saving into a habit, future you will be grateful.
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