One of the most important aspects of financial wellness is learning how to start saving money. That is why, Chapter 1 in our savings series focuses on this important habit.
While learning how to start saving probably seems simple at the surface, the concept remains challenging for many: As of late 2020, 34% of Americans had less than $1,000 in their savings accounts. If you’re in the same boat or just don’t have as much saved as you’d like this guide may be helpful to you.
When you have some money saving tips you can follow, building up your savings can become much more manageable. To guide you through this journey, this chapter takes you through important steps to start saving money and provides answers to your most pressing questions like how much should you have saved and how to maximize your saving efforts. Keep reading or use the links below to get started.
Savings Terminology to Know
Before we get started, there is some key savings terminology you should know:
This simply refers to any money transfers or contributions that are made to your savings account. From your end, the term can refer to:
- Over the counter
- Cash deposits
- Check deposits
- Online transfers
From the bank’s end, deposits come in the form of your interest or profit that is credited into your account.
This is the amount that you have available at the time of opening your savings account. Some banks and credit unions have minimum requirements for how much you should have in your account as your starting balance in order to avoid certain charges.
Typically, the ending balance is the final amount mentioned at the end of an account statement. While building your savings, it refers to the amount that is available in your savings account after your outlined contribution period has ended.
These are the payments, transfers, or deposits that you make into your savings account as a part of your savings plan each month. This value should be outlined in your budget.
This is the amount of money that you decide to put forward when you launch your savings plan. It is called an investment because it launches the process of earning interest or profit over your chosen savings account. You may need your initial investment to meet the minimum balance requirements of your chosen bank or credit union.
Years to Grow
This highlights the time that you give your savings plan to come to fruition. The growth factor refers to the process where your amount accumulates through your contributions and the account interest alike.
This refers to the interest you get on top of the interest that you have already earned through your original deposit. Many savings accounts have different frequencies at which they enable compound interest. While some do it on a daily basis, others may do it over a 6-month or 1-year period. The contribution is often minimal. But it is still a good practice to take note of it and choose accounts that offer it.
Annual Interest Rate
This is simply the annual rate at which your interest and fees are calculated on a yearly basis.
Annual Percentage Yield
The annual percentage yield (APY) is the interest that is offered on savings accounts. This also factors in compounding interest and gives you an estimate of how much profit you can earn over time, including the amount that you earn through your savings account.
Now that you have those terms in your arsenal, we can start talking about how to save.
Saving Money vs. Investing
When you are trying to learn good financial habits, you may stumble upon a heap of information that covers saving and investing money. While both approaches are clear in their distinction, it can still be a little confusing to distinguish between them. This is especially true when you are on the first steps of learning how to start saving for your future.
Let’s quickly review the difference between the two.
Saving is the practice of putting your money away in a safe place, where you can access it at a moment’s notice. This helps you build your cushion for emergencies, big purchases, and more through your primary method of income such as saving from each paycheck.
When you are saving money, you can expect your funds to grow slow and steady as you contribute consistently to the fund you’re building.
With investing, you are aiming to grow your wealth by putting your money into assets such as stocks, bonds, and mutual funds. Another common type of investment is purchasing real estate, which can be held onto as it grows in value or used as a second income stream from rental revenue.
Investing can give you significant returns over time. But it also carries certain risks of losing your funds based on how the market performs.
When planning for your future having an established savings typically carries less risk that relying solely on investment outcomes. However, many people do both as a way to build their wealth and prepare for retirement.
Major Differences Between Saving Money and Investing Your Funds
- Accessibility. When you are saving money, you can put it away in a checking or a savings account where you can access it right away. We’ll cover more about different account types of savings accounts in Chapter 4. When you are investing money, the process to retrieve your cash can be cumbersome, typically requiring you to liquidate your assets.
- Risk. Many savings accounts are insured by the FDIC and your money is generally considered secure. On the other hand, investing money in fluctuating assets can expose to the potential of losing that money for good.
- Returns. Saving through your net income lets you accumulate only as much money as you put away each month—unless you have a savings account with interest. It’s worthwhile to note that the interest on savings accounts is fairly low, but can add up over time if you leave your money sitting for years. Investing in assets gives you the chance to grow your funds beyond your original contribution and sometimes that can happen quickly.
- Resources. While both saving and investing require you to have some discretionary income to allocate to them, saving is generally considered one of the main elements of a standard budget. On the other hand, investing is an additional expense that is more of a luxury for most people.
Due to these factors, saving money typically holds a higher priority for many individuals than investing it. This is especially true when you need to start building an emergency fund.
How Much Money Should You Be Saving?
Once you decide to fully adopt money-saving practices, you’ll need to set your savings goals. While you can explore this topic in greater detail in Chapter 5, we’ll give you an overview of goal-setting when it comes to planning how much you want to save.
Whether you are saving for a house or building a college fund, you’ll want to decide on a personal savings rate. Simply put, this rate defines how much money you are saving from your net income after taxes.
To give you an idea of how much money other people save on an average basis: In January 2022, the U.S. monthly personal savings rate was approximately 6.4%. But depending upon your income, expenses, as well as long-term and short-term goals, you may have to move that number up or down for your own personal savings rate. Saving is important, but you should still be able to meet your basic needs first.
Apart from helping you take a closer look at your living expenses, setting your personal savings rate also assists you in planning for different objectives such as:
Many of these common financial objectives require varying amounts of money from your end. For instance, while an emergency fund typically comprises three to six months of your usual expenses, a home’s down payment may require more savings.
Paying Off Debt vs Saving Money: Which is Most Important?
Before you stop spending and start saving, you may want to first consider how much debt you have on your shoulders. This not only strengthens your financial responsibility, but also helps you save more funds in the long run.
If you have significant debt, a sizable portion of your monthly payments may cover only the interest before the rest of the amount is subtracted from your total outstanding balance. This holds true for many common types of debt such as mortgage, student loans, and credit card balances.
Over time, paying high interest rates can keep you from allocating more of your income towards your savings. This can hinder your plans to achieve larger financial goals and build the life of your dreams. As such, it may be worthwhile to consider paying off your debts before starting to save money.
But as you plan to pay off your debt, it is important to consider saving for an emergency fund first. This gives you a financial safety net to fall back on in unforeseen situations. Afterwards, you may look into settling your debt without having to worry about the absence of a rainy day fund.
While finding the balance between making debt payments and saving money, you may consider the following factors:
- Type of Debt. Settling smaller debts with high interest rates can go a long way towards your financial strength. Credit cards, personal loans, and payday loans often fall under this category.
- Personal Priorities. Do you feel financially insecure? Are you concerned that job instability may be on the horizon? If these types of thoughts are on your mind, you may be understandably prioritizing savings. However, if you’re looking to free up more of your income or reduce the mental weight of a large debt, paying off your remaining credit card debt may be one way to do that.
- Saving Contributions. Once you have your emergency fund in place and feel ready to focus on debt repayment, you may still want to make smaller contributions to your long-term savings. That way you’re continuously growing your funds.
Deciding whether to focus on debt repayment or savings is a highly personal decision that only you can make. But with some reflection, you can find the right path forward for you.
10 Practical Ways to Start Saving Money
The best way to start saving money depends on your financial habits and priorities, but here are some ideas for how to get started:
1. Budgeting for Groceries
No matter the size of your household, monthly groceries is likely one of your most important expenses, but you can still spend more consciously when you’re at the store. When you make a grocery budget, you can fulfill your crucial needs while also steering clear of unnecessary spend.
2. Downloading Budget Apps
While learning how to start budgeting and saving money, budget apps stand out as an useful tool. Since these apps are built to optimize your expenses like your rent budget and discretionary spending, they can help you understand how to budget to achieve your saving goals. Try Mint today to manage your budget and see where you can make changes.
3. Switching Cable or Phone Services to a Cheaper Plan
While you might have sworn by your cable or phone service providers for a long time, there might be cheaper options available on the market. In some situations, you might be able to switch to a more affordable service without a compromise on service quality.
4. Unsubscribing From Excessive Monthly Subscriptions
With multiple streaming services, food companies, and technology solutions now available at a monthly payment model, you may have fallen prey to excessive subscriptions. Take a quick look at where your payments are going, and consider unsubscribing from services that you don’t need.
5. Minimizing Energy/Electric Usage
Reducing your energy usage not only helps you become more environmentally friendly, but also lets you decrease your monthly bills. Check out these seasonal energy saving tips to see how you can make a change.
6. Reducing Eating Out/Bringing Lunch to Work
When you are hungry, you may not think twice about spending a few bucks on a delicious slice of pizza. But even the cheapest takeout options can add up in the long run—especially if you make it a habit. To reduce this expense, consider making most of your meals at home.
7. Making Coffee at Home
Your daily cup of joe may not seem too big of an expense, but it often comes down to a significant monthly spend. By investing in a coffee maker, you can potentially cut costs. You can then contribute the saved amount toward building your emergency fund.
8. Refinancing Your Mortgage
If you took out your mortgage a few years ago, better interest rates might be available for you in the current market. By exploring these options, you be able to refinance your mortgage at a reduced interest rate and save substantially.
9. Making Vacation Budgets
Vacations are considered a time to let loose. But when you have little to no money in your bank account upon your return, your carefree spirits may dampen right away. By making a budget for travel, you can have a good time without cutting into your savings goals.
10. Start Small to Grow Your Savings
It’s easy to feel overwhelmed by all of these changes. To make yourself feel more comfortable, take baby steps to grow your savings. Simple approaches such as the 52 week money challenge can be a good place to start when you’re getting comfortable with the idea.
Tips for Maximizing Your Savings Efforts
While learning how to start saving money, you may look into the following tips to take your efforts to the next level.
- Set short-term and long-term financial goals to keep yourself motivated.
- Include your intended savings amount in your monthly budget.
- Once you have enough money in your checking account, consider interest-bearing account options.
- Set automatic monthly deposits from your checking to your savings account.
- Reward yourself with small rewards for achieving larger savings objectives.
- Contribute any surplus amount from your monthly budget to your savings account if you can.
- Look into investment options after you’ve started building your savings.
Bottom Line: Make Lifestyle Changes to Start Saving Today
Learning how to start saving money may seem like a highly daunting task at first. But once you know what to do, you can breeze through adopting simple lifestyle changes to grow your funds. Since savings can help you prepare for a rainy day, cover your important purchases, and fulfill your bigger life goals, the practice can deliver short-term and long-term benefits alike. And, you can use tools like the Mint app to help you track and accomplish your savings goals.
Now that you have a better grasp on how to start saving money, you can move forward to our next topic in the series: Chapter 2: How Much Should I Save?
Sources: Bureau of Economic Analysis | Energy.gov | Statista