DISCLOSURE: Some of the links in this post may be affiliate links, meaning, at no cost to you, I'll earn a commission if you click through and make a purchase.
Saving money comes more naturally to some of us.
Is your intuition to spend your money as soon as you get it or hoard every last cent until life’s no fun? Or do you fall somewhere in between?
No matter what your saving and spending style, there’s almost always room to improve. For the natural spenders out there, it might take a little more self-discipline to start saving. But just like everything else in life, it becomes easier the more you practice.
This post will show you how to save money for emergencies, retirement, and all the stuff you want.
Why Should I Save Money?
Strategic saving will not only help you reach financial goals faster, it will also save you money, decrease your stress, and give you financial security.
By saving for the things you want, you’ll keep yourself out of debt (or stop accumulating it), and you’ll always have money to cover emergencies without turning to credit cards or loans.
Saving goes hand in hand with budgeting, so make sure you’ve created a budget before you think about saving.
Sure, you can go out and charge anything you want on your credit card. But then you pay interest, i.e. give your money away to the bank.
Don’t make the banks richer. Make yourself richer.
When you save money for purchases, you can shop around and get the best possible deal. You’ll also be more thoughtful about what you buy. And best of all? You won’t get ripped off by paying the bank 24% interest on something you bought for full retail price.
To save money in the most efficient way possible, you should prioritize in this order:
- Save a basic emergency fund of $1,000 – $2,000
- Pay off all debt
- Save six months’ expenses
- Save for retirement
- Save for the things you want
Step 1: Create a Basic Emergency Fund
After you’ve created a budget, and you know how much money you can save every month, your next step is an emergency fund. I know it isn’t fun, but it’s necessary. With an emergency fund in place, you can start saving for your next vacation or new car with no worries.
Start with $1,000 – $2,000, depending on your family’s needs. You should have enough in your emergency fund to cover any unexpected expense – a car breaking down, the water heater dying, a health crisis, etc.
I recommend saving the equivalent of your health insurance deductible as your minimum emergency fund. That way if a someone gets sick, you know you have enough to cover it. You might even add a few hundred more than that for extra cushion.
Whatever you decide, set a goal and stick to it.
Here’s a quick run-down of how to create an emergency fund and use it properly:
- Open a savings account, preferably with the same bank you have a checking account.
- Transfer money into the savings account from your checking account every time you get paid until you’ve reached your emergency fund goal.
- Do not touch this money unless you have a true emergency.
- When an emergency comes up and you use some of the fund, immediately replenish it with your savings budget until you reach your goal again.
Step 2: Pay Off All Debt
Pay off all debt before you begin saving for your long-term emergency fund, retirement, and other things you want. You don’t have money to save (except for an emergency fund) if you have even a single dollar of debt.
Step 3: Save Six Months’ Expenses
Once you have your basic emergency fund covered and all your debt paid off, it’s time to create a long-term fund that covers six months of your expenses. If your monthly expenses are $2,500, for example, aim to save $15,000.
Save this money in the same savings account that holds your basic emergency fund. You can even include these early savings in your larger fund. For example, if you need $15,000 to cover six months of expenses, but you already have $2,000 in your account, you only need to save an additional $13,000.
It might be tempting to immediately start saving for “things,” but having six months of expenses in savings will protect you in case of job loss or major catastrophes.
Step 4: Save for Retirement
If you haven’t already, start contributing to your employer-provided retirement plan, especially if they offer a company match. That’s free money! Contribute at least enough to get the match.
At the time of this writing, my employer offers a match of up to 3% and increases contributions by 1% every year until I reach 10% contribution. Talk to the benefits director at your company to find out if your employer offers any similar benefits.
You might also consider opening an Individual Retirement Arrangement (IRA) account or other investment accounts to save for retirement. The amount you need to save depends on your retirement goals. Do you want to retire early or are you happy working until you’re 65?
Step 5: Save for the Things You Want
With your emergency fund fully funded, no debt holding you back, and contributions to your retirement fund set up, you can finally move on to saving for more fun things like trips, cars, electronics, or even a house. The sky is the limit.
First, create a savings goal. Include the item you want to save for, the total amount it will cost, and the number of months it will take you to save the total.
Here’s an example of how you would plan to save for a vacation:
|Months to Save||12|
|Total Savings per Month||$ 450|
If you wanted to take a $5,400 vacation in one year, you would need to save $450 per month to reach your goal.
If you put $5,400 on a credit card with an interest rate of 18 percent and made the minimum payment, it would take 5 years to pay off and you’d pay an additional $2,908 in interest.
Even if you paid off the entire thing in a year, which most people won’t do, you’d still end up paying $535 in interest. It’s always better to delay gratification and save than to charge and pay interest.
Tips on How to Save Money
If you’re still having trouble saving, here are some tips that might help:
Don’t create too many goals.
When you first start saving, focus on one or two goals at a time. Spreading your money too thin means it will take forever to make any progress. If you only have $500 a month budgeted to save, and you have five savings goals, that only gives you $100 per month for each one. But if you save the whole $500 toward a single goal, you’ll get a payoff much sooner.
Automate your savings.
Most banks offer electronic banking that allow you to schedule transfers to your savings account. Schedule a monthly, bi-weekly, or even weekly transfer. If you get paid every two weeks and have a goal of saving $450 a month, you could schedule an automatic transfer for $225 every two weeks.
Use goal-based savings accounts.
Keep your emergency fund close to home, but for other savings goals, consider goal-based accounts. Capital One 360 supports multiple savings accounts that can be labeled for multiple goals. For example, you could have one “New Car Savings” account and another “Vacation Savings” account to keep your goals separate.
Get Started Now
If you’re ready to start saving and take back control of your money, get out there and open a savings account right now. Don’t wait. The sooner you start saving, the sooner you’ll reach your goals.
Remember, start with a basic emergency fund. Then pay off all your debt, save six months’ expenses, and contribute to your retirement account. Finally, create savings goals for all the fun stuff you want. You’ll be a super-saver before you know it.
Do you have any money saving tips you’d like to share? Leave a comment below and let us know!
More Posts in the Personal Finance 101 Series
This is the third post in my Personal Finance 101 Series. Please see parts one, two, and four below:
How to Create a Budget – (Part One) Learn how to create a budget so you can get out of debt and save more money for the things you want. This is my personal budgeting method and I’ve used it for many years with success. Don’t put it off any longer. Take back control of your finances!
How to Track Your Spending – (Part Two) After creating a budget, the single most important thing you can do to control your money is track your spending. You should know where every dollar goes to make sure you’re sticking to your budget. Learn three different methods of tracking and choose the one that works best for you.
How to Pay Off Debt – (Part Four) Are you ready to pay off the debt that’s been holding you back? With a good repayment plan and some self-discipline, you can be debt-free faster than you think. Learn how to face your debt, set attainable goals, and create a repayment plan that works with your budget.