How to Save Money: Easy Tips to Set Budgets and Goals
Saving money can seem like a daunting task, especially when you live paycheck to paycheck. By pinching pennies, sticking to a budget, and exploring potential side gigs, you can start saving money for your future and other financial goals.
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We all know how hard it is to save money. You always hope to have a little left over at the end of the month, but after you pay for things like rent and your enormous cell phone bill, there might not be much cash left.
However, saving money is important if you want to accomplish your long-term financial goals, which might include paying off high-interest credit card debt or student loans, building an emergency fund, or reaching big milestones like buying a home or fully funding a 401(k) retirement account or IRA.
The good news? You don’t have to be a personal finance guru to succeed. Here are some simple tips to start saving money fast.
Step 1: Map Out Your Goals
The first step to save money is easy. You don’t have to do anything other than spend some time daydreaming. What would you like your life to look like next year? In five years? In 20 years?
Do you want to have money set aside for a vacation? Do you want to pay off debt? Do you want to contribute to your child’s college education? Write down each of your goals, then estimate how much money you’ll need to accomplish each goal, as well as the number of months you have until you reach the deadline.
Having a clear idea of your financial goals is important because it will give you something to work towards. It will motivate you to save when you’d rather spend money, and it will also help you figure out how much you need to save each month to accomplish the things you want to do.
Step 2: Figure Out Your Current Monthly Spending
You can’t know how much you need to cut back if you don’t know how much money you’re currently spending and how you’re spending it. Take a look at your credit card statements, checking account statements, and cash receipts to get an idea — chances are you’re probably spending more than you think.
If your spending is higher than you imagined, perhaps you can identify areas where you’re spending on things you don’t need, such as monthly subscription services, convenience meals or foods, or costly entertainment purchases. Determining where you regularly overspend is key to figuring out where you can start cutting back.
It will also help you get started on Step 3: setting a budget.
Step 3: Set Monthly Budgets
Only 41% of Americans keep a budget, according to our personal finance statistics. This will make it hard to save money.
Your best bet when it comes to creating a budget that will work for you is to divide your take-home income into three separate pools of money: a necessities budget, a savings budget, and a fun money budget.
Many advisors recommend the 50/30/20 rule, where you dedicate 50% of your monthly income to necessities, 30% to other spending (including “fun money”), and 20% to savings and paying off debt.
If you follow this rule, you’ll be in good shape. However, we also recommend taking the goals you created in Step 1 and reverse-engineering this rule to see how much you could really save. If you can’t meet those savings goals with your current spending, you might need to drastically cut back or find a way to increase your income so you can start saving more.
The Necessities Budget
To create a necessities budget, start by adding up your non-negotiable obligations, such as rent or mortgage payments, auto insurance premiums, gas (or public transportation), utilities, and anything else you need to pay for every month. These are expenses you absolutely cannot do without. You should include money for grocery shopping here, but not for take-out food.
For budgeting purposes, subtract this amount from your gross (i.e. after-tax) income. If it’s less than half of your current income, great! You’re living beneath your means, which is a clear sign that you’re setting yourself up to build long-term wealth. If it’s more than half, you’ll need to make adjustments — but more on that later.
The Savings Budget
Although the 50/30/20 rule suggests you think about your savings budget last, putting it before your fun money budget is a way to ensure you make your future goals a priority rather than an afterthought.
To figure out how much you need to save, take the amounts you determined in Step 1 and divide each one by the number of months remaining in your deadline. For example, if you want to save $2,400 for a vacation in one year, you’ll have to put aside $200 per month in a dedicated savings account.
If this amount is less than 20% of your after-tax income, consider bumping up your savings to exceed your savings goals or reach them even sooner. You might also consider adding other goals since you have additional funds to allocate to your savings budget.
If this amount is more than 20%, though, you may need to cut into your fun money budget — or find ways to reduce your necessities budget — to stay on track.
Make sure to subtract both this budget and your necessities budget from your monthly cash flow so you know how much you have leftover for your final budget.
The Fun Money Budget
After you’ve taken care of your necessities and savings budgets, you get to decide what kind of fun things you want to do with the rest of your cash. You could use this money for dining out, shopping, or anything else not considered a “need.”
Add up the money you’re spending on things that fall into this category. If this amount is more than 30% of your after-tax income, you might not have enough to meet all your spending goals. In that case, get creative by finding ways to cut back or bringing in extra money. Can you start a side gig? Can you try cooking new meals at home instead of going out?
If the amount you’re spending is less than 30%, you’re in good shape. You can enjoy it now, but you also should consider creating a new savings goal or padding one of your other goals to exceed your original targets.
By putting extra money toward your goals, you can achieve them ahead of schedule or have more to spend on that goal when the time comes. Who wouldn’t want to retire early or have enough money to go on regular vacations?
Best Ways to Save Money Each Month
If you didn’t have enough cash flow to fulfill each of your three budgets, you’ll need to make some changes to your spending so that you can stay on track.
Here are 16 of the best money-saving tips:
- Rent a cheaper apartment. Renting a cheaper and smaller apartment, moving to a different neighborhood, or getting a roommate can help you save on housing costs.
- Refinance your mortgage. Refinancing your mortgage might potentially secure you a lower interest rate, which could reduce your monthly payment and save you money over the life of your loan.
- Bundle your insurance. Did you know you can get deals on auto, home, and pet insurance if you bundle them together by buying policies from the same insurer?
- Choose Netflix over cable. Cable bills have steadily gone up, but do you really need hundreds of channels? More people are cutting their cable and getting Netflix, Hulu, or other streaming services to save money every month.
- Write down your shopping list beforehand. Going to the grocery store to pick up a few things can often lead to impulse buys. Instead, write down your grocery list and stick to it so you only buy what you need.
- Switch cell phone providers. Cell phone bills can add up quickly, but switching could potentially save you money. At the very least, call your current provider and see what they can do to lower your existing bill.
- Sign up for budgeting software. Budgeting software can help you see in real time how much money you have left to spend in any given month.
- Brown-bag your lunches: Going out for lunch every day adds up. Make extra when cooking dinner so you can take leftovers to work the next day or try meal planning on the weekends so you have all your lunches ready to go.
- Find alternatives to going out. Going out with friends is fun but can easily blow your budget. Try hosting game night at home or invite people over for a potluck dinner. Whatever you do, find ways to have fun with friends or your significant other that don’t break the bank.
- Renegotiate your internet rates. Call up your internet provider and let them know you’re looking for a better rate. You can potentially lower your monthly bill by threatening (nicely, of course) to cancel your account.
- Comb your credit card statement for grey charges. Grey charges are charges you forgot about or don’t realize you’re paying every month, like ongoing subscriptions or gym memberships you’re no longer using.
- Work out at home. You might love going to the gym, but your membership costs a pretty penny. Comb YouTube for free at-home workouts to get your sweat on without the membership.
- Use the library. Don’t buy books, magazines, or DVDs. Instead, borrow them for free from your local library.
- Freeze meals. If you find yourself ordering pizza after work because you’re too tired to cook, try freezing meals ahead of time to save money on convenience foods.
- Choose generic over brand-name. Whether it’s medications or clothing, opting for budget retailers and products is often cheaper than spending money on designer labels.
- Make extra money. As much as you try to save money by spending less, sometimes there’s only so much cost-cutting you can do. That’s when it’s time to consider a side hustle to help you make money. Earning some extra cash can allow you to meet your financial goals and still have some fun money left over.
Creating a budget and finding ways to save money might seem complicated, but it’s really as simple as sitting down to think about your long- and short-term goals and figuring out how to adjust your spending to meet them.
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It might not be easy to overhaul your spending habits, but having a clearer picture of what you want to achieve can help you better keep track of your progress when you’re tempted to fork over money that could be put to better use elsewhere.
Author: Jeff Gitlen