How to Save Money
“Save and invest.” Great advice, but how do you get started? And how do you do it consistently and develop good, healthy money habits for the long term? Creating a saving plan is the first step toward creating a life of financial freedom.
Sticking With It
One great way to get started is to save a certain percentage of your income, say 10 or 20%, every month. If that sounds kind of high and difficult to do, plan to save maybe 5% or 8% and build from there. But, no matter where you start, you should pick an amount and stick with it, month after month, and commit to increasing the amount you save every month so that eventually you’re saving at least 20%.
50-30-20 Rule
One popular approach to saving and spending is the 50-30-20 Rule, which means that you spend 50% on your needs—things like rent, utilities, groceries, etc., stuff that’s necessary for survival. Then 30% goes towards your wants–dinner out, entertainment, and so on. Then 20% goes into savings.
Here’s a quick three-minute video from Khan Academy that explains 50-30-20.
Pay Yourself First:
20-50-30 Rule
We actually prefer to call it the 20-50-30 Rule. That means you set aside 20% for savings first, then spend 50% on needs, and finally 30% on wants.
This is often called Pay Yourself First. Before you spend money on the things you need and want for the month, put aside your savings first. That way, your savings become a priority over your expenses.
It may take a few months to get the formula right (maybe you start with 10% or 15% and see how it goes.)
An Example:
Let’s say your take-home pay is $3,000 per month. With the 20-50-30 Rule, you’d set aside:
• $600 for Savings
• $1,500 for Needs
• $900 for Wants
Here is a detailed look at this budget, organized by Savings, Needs, and Wants:
Savings | $ | Needs | $ | Wants | $ |
|---|---|---|---|---|---|
Paying Down Credit Cards* | 250 | Rent | 750 | Dining Out | 500 |
Minimum Debt Payments | 100 | Utilities | 100 | Entertainment | 100 |
Emergency Fund | 150 | Groceries | 200 | Health Club | 100 |
Investments | 100 | Basic Clothes | 65 | Streaming Services | 50 |
Car Payment | 150 | Designer Clothes | 150 | ||
Car Maintenance | 75 | ||||
Car Insurance | 65 | ||||
Mobile Phone | 40 | ||||
Home Internet | 30 | ||||
Total Savings | 600 | Total Needs | 1500 | Total Wants | 900 |
*It is vitally important to pay down your credit cards before spending money on any Wants.
Savings
So, what to do with the money you’ve saved? It should first go toward making at least the minimum payment on your debts—credit cards, student loans, etc. The next priority is building up an emergency fund to pay for any big unexpected expense, such as your car breaking down, or if you get laid off and can’t find a job for several months. Next, go back to your credit cards and pay off as much as you can. Finally, when your high-interest debit (credit cards, pay-day loans, etc.) is paid off, savings can go toward investing and making the money grow. Check out our other modules about those topics.
That money should be kept in a bank savings account. It should not be invested because you want the money to be readily available (also called “liquid”) in case you need it right away.
TIP: Automate Your Savings
The best way to make sure that you are saving consistently is to put your savings on autopilot. Immediately after your paycheck is deposited into your bank’s checking account, transfer the amount you plan to save into your savings account. Most banks have automatic transfer features. Contact your bank to find out how you can do it with your account. Some banks even have “buckets” where you can designate how you plan to use your savings. You could have an emergency fund bucket, an investing bucket, and a vacation bucket. Ask your bank if they offer the feature. If they don’t, you can simply keep track of your own buckets on a spreadsheet or in an app on your phone.
Action Plan
The very first step toward setting up a savings plan is to understand what your expenses are. For the next month, keep track of everything you spend. The easiest way to do this is to put everything on your credit card and/or debit card (no spending cash, unless you are careful about keeping track of that spending).
At the end of the month look at your statements and categorize all your spending. Which of those expenses are wants and which are needs?
You’re on your way to taking charge of your financial future!