Who among us wouldn’t like to find more ways to save money?
And yet, with rising costs of housing and other expenses of everyday life, it can be daunting to see where and how you can start beefing up your savings, while still enjoying life.
When you want to start saving money, you have to understand your finances. Being mindful of what you spend – and why – and keeping yourself on a budget based on your income will start you on the first step towards increasing your savings. From there, adopting simple practices that ensure you regularly contribute funds to a savings vehicle will help encourage you to stay on track.
How much could you save in a year? Start plugging in your own numbers and you may be surprised at the opportunities you’re missing right now.
Step One: Understand Your Current Financial Situation
Before you can start saving, you’ll need to understand your spending habits, and where your money goes on a regular basis.
No, you don’t have to track where every penny has gone, but instead, you want an overall understanding so that you can identify those areas for even more savings potential. Think of yourself as a business; you have to understand what’s going in and what’s going out to make yourself more profitable.
If you aren’t regularly managing your money, it may take a little time upfront to sort out your spending habits, but from there, you can set yourself on a path of saving for good.
Start by making three lists: one for your income, one for your needs, and one for your wants.
If you earn a salary, collect pay stubs or W2s from the past year to see how much you make with and without taxes. If you work periodically or as a freelancer, gather any checks or invoices and tax documentation. Figure out where else your money comes from, such as family gifts, Social Security, or alimony payments – and then you can look at how much you earn broken down by year, month, week, and even day.
Needs are what you have to spend money on to survive, including housing, food, healthcare, clothing, and transportation. These areas are non-negotiable expenses in general, but when you calculate them by category, you can see if there are some costs to cut back. For instance, if you drive to work every day but there is a convenient public transportation option, you can still get to where you need to go at a fraction of the cost.
Everything that you like to have but could live without is a want. Food is a necessity, but dining out is not. Go through receipts, credit card statements, and even cash withdrawal timing to figure out all the things you are spending on that aren’t necessary for survival.
Step Two: Craft A Budget
Once you can layout your spending patterns and your income – and how they relate to each other – it’s time to craft yourself a budget that will help you start to save money. Don’t think of your budget as a form of restriction; it’s not telling you that you can’t do something, your budget is instead helping you build something in the form of savings.
Your budget also won’t be set in stone. Plan on making changes whenever your situation changes. If you get a raise, how and where will you apportion the new funds? Be prepared to tinker as you need to while retaining the idea that you’re committed to mindful spending.
The simplest way to craft a budget that you can easily understand and stick with is to proportionally allocate your income into three categories: 50% goes to your needs, 30% goes to your wants, and 20% goes straight to savings. You can change these numbers as needed, but in general, this system will help you live within your means while still increasing your savings funds.
Step Three: Set Savings Goals
Do you have a big purchase or event in your future? From buying a house to getting married to preparing for retirement, the more you can clarify your specific savings goals, the easier it is to see progress made.
The best way to conceive of putting money directly into your savings is that you are paying yourself first. If you’re worried about sticking with regular savings payments, automatically send funds to a separate account so that they don’t even pass through your hands. If your paycheck is directly deposited into a checking account, see if your company will split your check into two different accounts, with the other going straight to savings.
Step Four: Find The Right Savings Vehicle (Or Two)
Knowing what to save is one thing, knowing where to save it is another. Many savings vehicles also offer even more perks, such as tax reductions, in addition to being a place to store your
Savings accounts at banks can vary depending on what your balance is and how much you save regularly. Some will have fees, while others may require minimum balances. The downside of savings accounts is that interest rates are typically low; the current average savings rate reported by the Federal Deposit Insurance Corporation (FDIC) is .06%.
Certificate of Deposits (CDs)
A CD is like a savings account, but it is a time-limited way to protect your money while it grows. You choose the length of the CD, and agree to leave your money there until maturation – or pay a fee for early withdrawal. CDs have higher rates than a regular savings account; the current average interest rate for a three month CD is .11% according to the FDIC. CDs also protect your money from yourself, as they make it much harder for you to remove funds on a whim.
A 401(k) is an employer-sponsored retirement plan that allows you to contribute money to your account pre-tax. Many employers match contributions to these accounts, giving you even more bang for your buck. If you have been ignorant of your 401(k) so far, Blooom can help you gain control.
Individual Retirement Accounts (IRAs)
An IRA is an individual retirement savings plan, and also allows for tax savings on your contributions like a 401(k).
Step Five: Money Saving Tips To Use Everyday
Now that you have a better understanding of your finances and have a budget to utilize moving forward, you can start saving money right now with these simple tips.
How To Save Money On Insurance
If you have a car, then insurance is a necessity, but there may be ways to lower your premium. If you’ve had a clean driving record, see if your insurer will drop your rates, and look into higher-deductible plans if you can cover surprise costs with an emergency fund. Compare home insurance policies and make sure that you aren’t paying for coverage that you don’t need.
How To Save Money When Shopping
Just because you are saving doesn’t mean that you aren’t still spending money unnecessarily, so using cash instead of a credit card will make you more mindful of every dollar that goes out. Cash can also be a great way to stick to your budget, as you can’t buy more than you have on hand.
How To Save Money On Utilities
Start dropping your electricity consumption immediately by raising your thermostat a few degrees in the summer, and dropping it in the winter. Compare cable providers in your area, and see if there are streaming options that are far cheaper so you can cut the cord entirely. Look at your cell phone plan cost and usage, and see if there is a more affordable option that will still fit your needs.
Saving money often feels like an overwhelming, abstract concept, but by understanding your relationship to money, and how you spend it, you’ll be better prepared to make simple but effective changes to your habits, saving more in the long run.
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