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How to Save Money

Saving money is one of those tasks that’s so much easier said than done — everyone knows it’s smart to save money in the long run, but many of us still have difficulty doing it. There’s more to saving than simply spending less money, although this alone can be challenging. Smart money-savers also need to consider how to spend the money they do have as well as how to maximize their income. Start with Step 1 below to learn how to set realistic goals, keep your spending in check, and get the greatest long-term benefit for your money.

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What to do

Pay yourself first. 

The easiest way to save money rather than spending it is to make sure that that you never get a chance to spend the money in the first place.

Arranging for a portion of each paycheck to be deposited directly into a savings account or a retirement account takes the stress and tedium out of the process of deciding how much money to save and how much to keep for yourself each month — basically, you save automatically and the money you keep each month is yours to spend as you please. Over time, depositing even a small portion of each paycheck into your savings can add up (especially when you take interest into account) so start as soon as you can for maximum benefit. 

  • To set up an automatic deposit, talk to the payroll staff at your job (or, if your employer uses one, your third-party payroll service). If you can provide account information for a savings account separate from your basic checking account, you should generally be able to set up a direct deposit scheme with no problems.
  • If for some reason you can’t set up an automatic deposit for each paycheck (like if you support yourself with freelance work or are paid mostly in cash), decide on a specific cash amount to manually deposit into a savings account each month and stick to this goal.

Avoid accumulating new debt.

Some debt is essentially unavoidable. For instance, only the very rich have enough money to buy a house in one lump sum payment, yet millions of people are able to buy houses by taking out loans and slowly paying them back. However, in general, when you can avoid going into debt, do so. Paying a sum of money up-front is always cheaper in the long run than paying off an equivalent loan while interest accumulates over time.

  • If taking out a loan is unavoidable, try to make as big of down payment as possible. The more of the cost of the purchase you can cover up front, the quicker you’ll pay off your loan and the less you’ll spend on interest.
  • While everyone’s financial situation differs, most banks recommend that your debt payments should be about 10% of your pretax income, while anything under 20% is considered healthy. About 36% is seen as an “upper limit” for reasonable amounts of debt.

Set reasonable savings goals.

It’s a lot easier to save if you know you have something to save for. Set yourself savings goals that are within your reach to motivate yourself to make the tough financial decisions needed to save responsibly. For serious goals like buying a house or retiring, your goals may take years or decades to achieve. In these cases, it’s important to monitor your progress on a regular basis. Only by stepping back and taking a look at the big picture can you get a sense for how far you’ve come and how far you have left to go.

  • Big goals, like retirement, take a very long time to achieve. In the time needed to reach these goals, financial markets are likely to be different than they are today. You may need to spend some time researching the predicted future state of the market before setting your goal. For instance, if you’re in your prime earning years, most financial commentators say that you’ll need about 60-85% of your currently yearly income to maintain your current lifestyle each year you’re retired.

Establish a time-frame for your goals.

Giving yourself ambitious (but reasonable) time limits for achieving your goals can be a great motivational tool. For example, let’s say that you set a goal of being on your way to owning a house two years from today. In this case, you’d need to investigate the average home cost in the area you’d like to live in and start saving for the down payment on your new house (as a general rule, down payments are often required to be no less than 20% of the purchase price of the house).

  • So, in our example, if houses in the area you’re looking at are about $300,000 apiece, you’ll need to come up with at least 300,000 × 20% = $60,000 in two years. Depending on how much you make, this may or may not be feasible.
  • Setting time frames is especially important for essential short-term goals. For instance, if your car’s transmission needs to be replaced, but you can’t afford the new transmission, you’ll want to save up the money for the replacement as quickly as possible to ensure you’re not left without a way to get to work. An ambitious but reasonable time frame can help you achieve this goal.

Keep a budget.

It’s easy to commit to ambitious savings goals, but if you don’t have any way to keep track of your expenses, you’ll find that it’s difficult to achieve them. To keep your financial progress on-track, try budgeting out your income at the beginning of each month. Assigning a set portion of your income to all of your major expenses ahead of time can help ensure that you don’t waste money, especially if you actually divide each paycheck according to your budget as soon as you get it.

  • For instance, on an income of $3,000 per month, we might budget as follows:
  • Housing/utilities: $1,000
  • Student loans: $300
  • Food: $500
  • Internet: $70
  • Gasoline: $150
  • Savings: $500
  • Misc.: $200
  • Luxuries: $280

Record your expenses.

Keeping a tight budget is a must for anyone looking to save money, but if you don’t keep track of your expenses, you may find that it’s difficult to stick to your goals. Keeping a running tally of how much you’ve spent on various types of expenses each month can help you identify “problem” areas and adjust your spending habits to fit your budget. However, keeping track of your expenses can require a serious attention to detail. While everyone should keep track of major expenses like housing and debt repayment, the amount of attention you devote to minor expenses generally increases with the seriousness of your financial situations.

  • It can be handy to keep a small notebook with you at all times. Get in the habit of recording every expense and saving your receipts (especially for major purchases). When you can, enter your expenses in a larger notebook or a spreadsheet program for your long-term records.
  • Note that, today, there are many apps you can download to your phone that can help you keep track of your expenses (some of which are free).
  • If you have serious spending problems, don’t be afraid to save every single receipt. At the end of the month, divide your receipts into categories, then tally each up. You may be shocked how much money you spend on purchases that are far from essential.
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Start saving as early as possible.

Money that’s squirreled away in savings accounts usually accumulates interest at a set percentage rate. The longer your money remains in the savings account, the more interest you accumulate. Thus, it’s in your advantage to start saving as soon as you possibly can. Even if you’re only able to contribute a tiny amount to your savings each month when you’re in your twenties, do so. Relatively small amounts of cash left in interest-yielding accounts for long periods of time can eventually accumulate to several times their initial value.

  • For example, let’s say that, by working a low-paying job during your twenties, you eventually save up $10,000 and put this money into a high-yield account with a 4% annual interest rate. Over 5 years, this will earn you about $2,166.53. However, if you had put this money away one year earlier, you would have made about $500 more by the same point in time without any extra effort — a small but not insignificant bonus.

Consider contributing to a retirement account.

During the years when you’re young, energetic, and healthy, retirement can seem so far away that it’s almost not worth even thinking about. By the time you’re older and begin to lose steam, it can be allthat you think about. Unless you’re one of the lucky few who stand to inherit serious wealth, saving for retirement is something you’ll need to think about once you establish a stable career — the sooner, the better. As noted above, though almost everyone’s situation is different, it’s wise to plan on having about 60-85% of your yearly income available to maintain your current standard of living for each year that you are retired.

  • If you haven’t already done so, talk to your employer about the possibility of contributing to a 401(k). These retirement accounts allow you to automatically deposit a set amount of each paycheck in the account, making saving easy. Additionally, the money you deposit into a 401(k) is often not subject to the same taxes as the rest of the money in your paycheck. Finally, many employers offer proportional matching programs with their 401(k) services, meaning that they’ll match a certain percentage of each payment.
  • As of 2014, the maximum amount of money you are allowed to place in a 401(k) per year is $17,500.

Make stock market investments cautiously.

If you’ve been saving responsibly and have a little extra money at your disposal, investing in the stock market can be a lucrative (but risky) opportunity to make extra money. Before investing in stocks, it’s important to understand that any money you invest in the stock market can potentially be lost for good, especially if you don’t know what you’re doing, so don’t use this as a method for long-term saving. Instead, treat the stock market as a chance to essentially make educated gambles with money you can stand to lose. In general, most people don’t need to invest in the stock market at all to responsibly save for retirement.

Don’t get discouraged.

When you’re having trouble saving money, it’s easy to lose your nerve. Your situation may seem hopeless — it may seem almost impossible to save up the money you need to meet your long-term goals. However, no matter how little you’re starting with, it’s always possible to begin saving money. The sooner you start, the sooner you can be on your way to financial security.

  • If you’re discouraged about your financial situation, consider talking to a financial counseling service. These agencies, which often operate for free or very cheap, exist to help you begin saving so that you can meet your financial goals. The National Foundation for Credit Counseling (NFCC), a non-profit organization, is a great place to start.

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