A complete beginner's guide to saving money
By now, we all know that skipping that $5 Starbucks coffee (actually, more like $7—thanks, inflation) isn’t going to be what makes you a millionaire. And we’re here to say keep on with that Starbucks coffee and avocado toast if it sparks joy. But, at the same time, don’t write off the idea of saving money.
Like going to the doctor, breaking up in person, and taking your medicine, savings are a necessary part of life. You need to save for retirement, a down payment, and emergencies. Of course, the idea of ever having enough to cover all those things can be incredibly overwhelming if you haven’t even started. We can help.
Savings is all about starting as soon as possible and having a plan in place for your money. And if you follow our tips, you’ll be impressed with how much you’ve managed to save one year from now.
Saving money vs. investing
Before we dive into all-things savings related, let’s talk about the difference between saving money and investing. People sometimes use the two terms interchangeably, calling their investments savings. We’ll be that person and point out that is incorrect.
Saving is when you keep your money in a risk-free, easily accessible place. In comparison, investing is when you use your money to buy assets (stocks, real estate, etc.) in the hopes that you can grow your capital. Investments come with a risk—you don’t know if they’ll go up or down in value. And investments are usually harder to pull out, often taking a few days and sometimes coming at a cost.
You might not like hearing this, but it’s imperative to do both. You need to have savings to get you through emergencies and save for bigger purchases like a car or a house. But you shouldn’t keep all your cash in savings either. You should invest some of your money so it can hopefully grow and earn you more.
How can you possibly balance the two? Well, first, make sure you have a fully funded emergency fund. After that, you can personalize how much of your money goes into savings versus retirement, depending on what you might be saving for. For example, after that emergency fund is big and loaded, you might do a 50/50 split between saving for a house and putting money into an investment portfolio. Despite what older personal finance gurus might tell you, there are really no rules here. It’s your wallet, so do what feels best for you.
A little goes a long way
One of the biggest reasons people hesitate to save is they think they can’t put away enough to make a real difference. But, you’d be surprised by how quickly setting aside even a little bit can make. For example, setting aside $209 from a bi-monthly paycheck will get you $10,000 saved in two years.
Take inspiration from Nike and just do it. Start saving what you can today and watch it grow.
How much should you save?
So, we've got you on board with saving, and the next step is to set some goals. Otherwise, this is going to feel like a chore without purpose. Can you imagine having a plan to lose weight without an end number in sight? Probably not. Well, it's the same with savings.
It's not that you will stop saving after a certain point, but you might move on to new goals.
So, when deciding how much you should save, follow this plan:
First, save for an emergency fund. This fund is something you dip into when real emergencies happen. And we don't mean "your favorite jacket got ruined at the dry cleaners" emergency. Instead, it's for emergencies like unexpected medical bills, car damage, and unemployment. Try to have an emergency fund that can cover somewhere between 3 to 6 months of expenses.
After your emergency fund is nice and bulked up, you can focus on your next big goal. This can be saving for a down payment on a house or car, returning to school, or renovating your home.
Once you've saved up for your big goal, you can move on to another one or switch to investing instead of saving.
You’re priority #1, so pay yourself first
Have you gotten excited about saving in the past, promised yourself you'd hit a specific goal by the end of the month, and ultimately failed? Don't worry—it happens to the best of us. If you're in this situation, it's probably because you're not paying yourself first.
The pay-yourself-first method says you take out your savings as soon as you get paid. This way, you're not waiting until the end of the month to save "what's left over." Because, let's be honest, with temptations like UberEats and spontaneous vacation trip invites from friends, "leftover money" will never happen.
Automate your savings, so you don't have to think about it or have access to the money. The money can be deducted the same day you get paid. Now, you're paying yourself first without even thinking about it.
5 tips on how to save money today
Another reason you've probably struggled to save is that you spend a little more than you should. Honestly, most of us are guilty of overspending. But, if you want to save, you'll have to check that spending.
Here are some practical tips on how you can curb your spending and start saving that paycheck.
1. Stop eating out so much
We're not here to tell you to stop eating out entirely. Come on, we're not animals! Listen, you still have to enjoy your life. And that sometimes means you stop for an overpriced Crumbl cookie or grab a $17 burrito for lunch.
But, if you're eating out every day or every few days, it needs to stop. We'd be less blunt, but we think you have to hear the cold, hard facts. The average American household spends $2,375 annually on eating food outside of the home. If you're in this range and you can cut the amount in half, that could be more than $1,000 in your savings.
Embrace cooking at home and meal prep to make life a little easier. Save the dining out for special occasions or days when you really need it.
2. Use coupons and rewards
The TV show Extreme Couponing has really painted couponing in a negative light. But you can use coupons without being an extreme hoarder who purchases 75 cans of black beans.
Using coupons to your advantage is just a wise financial decision. Before shopping, look up your local grocery store coupons and plan your meals around the best deals.
Also, take advantage of credit card rewards. Of course, you should only do this if you're responsible with credit cards (as in, you can resist the urge to overspend). But if credit cards make you feel like you're the heir to an imaginary empire with unlimited funds, go ahead and skip this suggestion.
Credit cards may offer many perks, including cash back, gift cards, and travel rewards. The right credit card can save you a lot of money if you use it well. Consider taking the cash back option and putting that money into your savings account.
3. Automate your savings
We touched on this already, but if you want to see your savings grow, you need to automate the process. If the money is taken out of your account on the same day you’re paid, you can’t ever be tempted to spend it.
4. Review your expenses
Do you feel like you earn a somewhat decent income but have no idea where all the money goes? It's probably time to sit down and find out. Take some time to look at all your expenses over the last 6 months and categorize them. Doing this will let you see what you should stop paying for, like that Pilates monthly membership that you only use twice a month. And it'll show you what areas you overspend, like your bad habit of catching an Uber every weekend.
Find areas where you can cut down on expenses and redirect that money to be put toward your savings instead.
5. Stop comparing yourself to others
We're looking at you, Instagram. Social media makes it easy to get sucked into the belief that everyone is living a better life than you. Constantly comparing your life to others can lead to you making some bad financial decisions, like purchasing $2,000 festival tickets or going to the latest trendy bar that charges $29 for a mediocre martini.
Everyone shows their best days online. Remember that when you're wondering why everyone seems to have a yacht all of a sudden, and you can barely afford the 10-year-old car that you got from your parents. Don’t let what you see others doing online sway your financial decisions.
Should you pay off debt or focus on savings?
One important topic we haven't covered yet is debt. Many people with outstanding debt (car loans, student loans, mortgages, credit lines, credit card debt) wonder if they should postpone savings until they've paid off their debts.
Ultimately, the decision is up to you. One solid plan you could follow is to 1) prioritize saving up an emergency fund, 2) pay off high annual percentage yield debt, and 3) focus on savings. Here's why: without an emergency fund, if an emergency does come up, you won't have the money to pay for it and you'll end up in even more debt. After your emergency fund is covered, you'll want to eliminate high-interest debt because it's costing you money. After that, you can finally focus on your savings goals.
Where to keep your savings
Remember to keep your savings in an account you can easily pull from. And make sure your money works for you. Keep your cash in a high-yield savings account so you earn interest monthly.
The remaining FAQs
And now, every other question about savings we haven’t yet answered.
1. When should I start saving?
Now. You should start today, immediately after you finish reading this. Even if you set up an automatic $5 savings contribution from your paycheck, it’s something. Just don’t delay any longer!
2. How much of my income should go into savings?
The general rule of thumb financial experts like to follow is the 50/30/20 rule. Assuming you're debt-free, 50% of your income should go to your needs (housing, food, transportation, utilities), 30% to your wants (entertainment, shopping, vacations), and 20% to your savings, investments, and retirement funds.
You might not get to 50/30/20 right away, but it can be the place you work yourself up to.
3. Is money left in a savings account safe?
Yes, all deposits made by consumers into savings accounts are guaranteed. If your money is with a bank, it's protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per insured bank, and per ownership category. And if your money is with a credit union, it's covered by the National Credit Union Administration (NCUA).
4. Should I invest my savings?
If you're saving for a big purchase, like a down payment, you may be tempted to invest the money in the stock market in the hopes that it increases in value. However, it's essential to understand that this comes with significant risk. No one knows how the market will operate, and you could be selling at a loss when you're finally ready to purchase a home. So, it's up to you whether you want to gamble, but a savings account is the safest place to keep your money.
Start saving…like yesterday
You officially have no excuses now. After this complete walkthrough, you should understand how important saving is and how easy it can be to start. You have marching orders to get started on your new savings goal TODAY.
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