The most typical piece of advice you’re guaranteed to hear is “save your money!” Across all personal finance websites, publications, and books, whether you listen to a big-wig guru or consult with a financial expert.
It’s not because anyone believes you should hoard your money; rather, it’s because it’s difficult to reach any significant milestones without saving money in advance.
The Best Way to Start Saving
There is never a bad time to start saving money, but the hardest part can be figuring out how and where to begin.
You can seize new possibilities in the future by saving money now.
There is never a bad time to start saving money in a high-yield savings account. To learn more, click on your state.
Create a budget first.
Understanding where your money is currently going and identifying places where you can cut the fat by creating and adhering to a budget are the first steps.
Some people prefer to use the traditional method of opening their bank statements, writing out each purchase by hand, or keeping note of them on a spreadsheet, and then comparing the sums to their monthly after-tax income.
A high-tech alternative is to use an automated financial tracking tool like Mint or You Need a Budget (YNAB), where you can link your checking and credit cards to your budget and have every purchase you make immediately tallied.
Making a budget is a terrific way to start saving more money, but what are your long-term plans for the cash you have amassed? How else may you spur yourself on to be more diligent and save more money.
Setting precise financial goals and putting money aside for future expenses such as a down payment on a home, a college fund for your children, a trip to Hawaii, a year’s worth of holiday gifts for the family, etc. are vital, according to many savers.
According to John Pilkington, CFP, senior financial counsellor of Vanguard Personal counsellor Services, “You have to ask yourself what you are saving for and when is this money going to be drawn on.”
Create a fund for emergencies.
Create an emergency savings fund as soon as possible if you’re just starting to save money.
An emergency fund should ideally be able to cover three to six months’ worth of “non-discretionary spending,” which includes your fixed monthly expenses like rent or a mortgage as well as the typical cost of bills, groceries, transportation, and other unplanned but unavoidable costs.
In other words, the total expense of all of your “needs” but none of your “wants.”
Your best option for storing that money is in a high-yield savings account because the interest it earns is often greater than that of a standard bank account. It is also simple to access an online savings account, but not so simple that it would be tempting to withdraw money and spend it on unnecessary items.
The high-yield savings account from Ally is a fantastic choice because it pays 0.6% (as of November 2020), has no monthly service fees, and is entirely online, all of which can help you resist the want to withdraw money immediately.
Your emergency fund should get roughly 10% of each salary until it is fully funded, although any sum more than zero is preferable. Setting up an automated transfer of a manageable portion of your paycheck to a high-yield savings account is a simple method to start developing the saving habit.
You can then establish specific goals for boosting your savings every few months. For instance, you may transfer 3% of your monthly pay into a savings account, then 6% in three months, and finally 10% in the following three months.
Of course, your ability to consistently save more than 10% and increase your emergency fund more quickly will rely on your income and spending plan.
Invest for the future
Do you hold a regular job?
If so, it’s likely that you have access to an employer-sponsored retirement plan.
These plans often include 401(k)s that are funded with pre-tax money or Roth 401(k)s that are funded with after-tax money.
If you don’t make a contribution right now, you might as well be handing out free money.
That’s because businesses frequently provide a 401(k) match up to a specific amount.
As of last year, the average was roughly 4.7%, which means that if you contribute at least 4.7% of your paycheck to your 401(k), your employer will also contribute 4.7% of your salary.
A simple method to increase your savings and prepare for retirement is to take full advantage of your employer’s match.
“Two-thirds of Americans with available 401(k) matches don’t take full advantage of that match,” claims Pilkington.
Of course, you can contribute more to your 401(k) after the employer match, but for 2020 and 2021, the maximum contribution for anyone under 50 is $19,500. Those over 50 are permitted to make an additional $6,500 in “catch-up” payments each year.
The ideal alternative for people without access to a 401(k) plan through their employer, as well as those who are self-employed or independent contractors, is an Individual Retirement Account (also known as an IRA).
There are two choices in this category:
A Roth IRA is preferable for people who anticipate earning more money as they age because it is taxed now rather than later. Traditional IRAs allow money to grow tax-free until you start taking distributions no later than age 72. (This is because as your income increases, you’ll be in a higher income tax bracket, and paying your taxes is less expensive when your tax rate is lower.)
The Roth IRA, according to Pilkington, is also more adaptable than a traditional retirement account: “It’s an excellent vehicle to save for retirement while also having the liquidity to draw from for a big purchase like buying a home.”
This is due to the fact that contributions are free from penalties as you have already paid taxes on them. (In most circumstances, you must wait until you are 59 12 years old before you may withdraw any earnings from stock market contributions.)
Making this investment in your future self and the lifestyle you want to lead as you age is extremely important, even though it can be annoying because you can’t touch the money for decades.
Start investing
You might be fortunate enough to have some money left over at the end of each month if you are able to pay your expenses, have established an emergency fund, are taking full advantage of your employer’s retirement match, and are paying all of your obligations. When this happens, investment can support your savings plan.
There are numerous options for investing. In fact, you’re probably already a member of some kind of investment fund if you’re contributing to a retirement plan.
While buying and trading individual stocks is the most typical way that people get into investing, most beginners find that starting with mutual funds or exchange-traded funds (ETFs) is more simpler and much safer.
If you have a 401(k) or IRA, you will likely have access to a menu of investing options that includes target-date funds, which are mutual funds whose manager changes the allocation of stocks and bonds as you come closer to your desired retirement year.
A mutual fund, which is effectively a collection of equities managed by a fund manager, can be purchased through the fund company directly or from a brokerage like Schwab or Fidelity. The majority of financial advisors advise index funds over active funds, which hire a portfolio manager to try to select winning stocks.
Index funds seek to imitate the performance of the stock market as a whole. So-called robo-advisors utilise computer algorithms to help match you with a portfolio of index funds based on characteristics like your age and risk tolerance if you do want some hand holding.
One thing to keep in mind is that, while investing is the best way to grow your savings and build wealth over the long term, you can lose money and must be prepared to endure stock market downturns. Before you begin investing, make sure you have a savings horizon of at least three years and preferably longer.
Simple Methods to Save Money
Experts provide a variety of methods and techniques to help consumers save more money. Every person responds differently to different approaches, and occasionally a tactic may even backfire. In the end, it comes down to what suits you the best. Here are a few well-liked methods of saving, supported by consumer psychology and financial advisors:
Automatically Save Money
Want to make money savings without even trying? Take yourself out of the picture so that you don’t even notice your most recent savings allocation on payday.
Many firms provide their workers the option of choosing how their salaries are split. You may, for instance, submit papers to your employer directing 90% of your income to your checking account and 10% to a savings account, possibly one that you maintain at a different bank.
Alternatively, even if your checking account and connected savings account are on different banking platforms, you can set up automatic transfers online from your checking account to the linked savings account on payday if your paycheck can only be deposited in one location.
According to Pilkington, automating can help you psychologically condition yourself to stop viewing that money as expendable, consumable revenue.
Reduce your debt
Some experts would advise you that your main objective should be debt repayment before you start concentrating on conserving money. While it is important to pay off high interest debts like credit cards and payday loans as away, especially if you are falling behind on your payments, it is not necessary to do so.
Federal student loans and mortgages are examples of “good debt” because they have low interest rates, don’t lower your credit score, come with tax advantages, and ultimately aid in wealth accumulation.
You run the danger of experiencing substantial turbulence if you experience a financial emergency if you rapidly pay off “good debt” to the point where you have little to no savings. Your priority should be making regular, full payments on high-interest bills.
“Paying down higher interest rate debt gives people a guaranteed return,” claims Pilkington.
Divide Your Savings Goals Into Manageable Amounts
Starting from nothing and trying to save $1,800 in a year for an emergency fund is a tough undertaking, to say the least. You can breathe a little easier if you break it down into monthly savings of $150, but it is still a sizable sum of money.
When you break it down even further, though, you see that $1,800 in a year is only $5 a day, which is certainly much more manageable.
It is simpler for people to save money when they divide it up into daily payments, according to researchers from the University of California, Los Angeles, and the University of London.
The money won’t be available for you to spend on anything else if you make a $5 daily contribution or budget for a $5 daily transaction. This strategy won’t affect the total amount you save, but it can keep you on target for long-term objectives.
Cut Your Bills Monthly
Subscription fees are an inevitable part of modern life in the form of streaming services, news websites, meal kit delivery services, takeaway apps, grocery delivery services, and the list goes on.
All of those fees combined with your regular monthly expenses might soon consume a significant portion of your income.
Examine your monthly expenses closely (which should be simple given that you have been monitoring them in a budget). Do you have any subscriptions that you simply don’t use enough to justify?
It’s time to cancel your subscriptions if you never watch anything on Hulu or end up throwing away half of those prepared meals. This will free up more cash for savings.
Make contact with all of your monthly service providers and request a better deal as an additional means of recovering some money. Your phone, cable, and internet rates are all up to negotiation, and you might be able to get a lower rate without having to switch cell phone providers or give up access to some premium cable channels.
Simply phone the retention and cancellation department of your provider’s customer support line, ask to be put on the call and demand a reduced fee in a forceful but polite manner.
Earn Cashback While Shopping
You can make money when shopping at grocery shops or online, did you know that? There are basically two methods to do it:
The first is making all of your purchases through an internet store like Rakuten. Alternatively, you can download the Rakuten browser extension, which notifies you of the cash back offers available when visiting other websites, and go directly to the Rakuten website.
search for the things you’re looking for, and then click through to the sites offering the best rewards for users. You can cash out incentives as quarterly checks as you accumulate them.
The issue with these sites is that you need to do your research; if you only think about obtaining cash back, you can overlook a more affordable choice that doesn’t offer cash back. Furthermore, only use cash-back websites for necessities rather than wants. It’s simple to end up purchasing random items you don’t need if you’re not careful.
Utilising a credit card with cash back is the alternative. In the world of personal finance, credit cards occasionally have a poor rap because, if used carelessly, they may quickly rack up debt for users.
However, it makes sense to benefit from big credit card rewards programmes if you always pay off your debt in full each month (which you should!). Consider the American Express Blue Cash Preferred® Card, which enables customers to receive 6% cash back on $6,000 in annual grocery store expenditures.
Invest in premium products.
Have you ever heard of the socioeconomic injustice “Boots” theory? Sam Vimes, a character in Terry Pratchett’s 1993 novel Men at Arms, says that one reason affluent people are wealthy is because they spend less money over time. A wealthy man, according to him, can spend $50 on boots that will last for years, negating the need to purchase other pairs.
On the other hand, a poor man will only be able to use a less expensive pair of $10 boots for one or two seasons before they start to fall apart. The poor guy will eventually spend more money than the rich man does because he will buy more pairs of boots over the course of his lifetime, even though the rich man initially makes a more expensive purchase.
Although it can be challenging to pay more than you normally would for higher-quality goods, there is ample evidence to suggest that many purchases are worthwhile in the long run.
To be clear, this does not imply that you should spend a fortune on showy brand-name goods; there is a difference between luxury and quality, and high price does not always equate to durability.
The boots hypothesis is most effective in real-world situations when it is applied to necessities and goods that can be used repeatedly without needing to be replaced.
Stainless steel pots and pans for home chefs, a family computer with plenty of memory and storage space, heirloom-quality children’s clothing, and (of course) work boots for people whose jobs require a lot of physical labour are some examples of purchases based on the smart boots theory.
Try a spending moratorium
Go an entire day without making a purchase; it’s one of the simplest suggestions on this list because most people do it regularly without realising it.
Each person can set their own spending restrictions, and it is not necessary to limit them to a single day. Others try to go a day or even an entire weekend without spending a single dollar.
Some people like to set up a week or two when they only spend a certain amount of money, strictly on basics.
You might find that there is extra money in your budget at the end of each month when you develop the practise of not spending any money at least one day a week.
