Starting to save money is a big step toward taking control of your finances. In this first chapter of our savings series, we’ll break down the process in a simple way.
Even though saving money might seem easy, it’s not always simple in practice. In fact, by the end of 2020, about 34% of people in the US had less than $1,000 in their savings accounts. If you find yourself in a similar situation or wish you had more saved up, you’re not alone.
But don’t worry! This guide is here to help. With some money-saving tips to follow, growing your savings can become easier. We’ll guide you through the important steps to start saving money, and we’ll answer common questions like how much you should aim to save and how to make the most of your efforts. Let’s get started on your saving journey!
| Key Information | Summary |
|---|---|
| Importance of Saving Money | Saving money is a crucial aspect of financial well-being. Despite its apparent simplicity, many struggle with saving – 34% of Americans had <$1,000 in savings. |
| Savings Terminology | Understand terms like Deposits, Starting Balance, Ending Balance, Monthly Contributions, Initial Investment, Years to Grow, Compound Interest, etc. |
| Saving vs. Investing | Distinguish between saving (putting money aside) and investing (growing wealth through assets). |
| How Much Money to Save | Determine your personal savings rate based on your financial goals, considering income, expenses, and objectives. |
| Practical Ways to Start Saving | Tips include budgeting, using apps, switching services, minimizing expenses, energy reduction, meal planning, making coffee at home, refinancing, etc. |
| Tips for Maximizing Savings Efforts | Strategies for better saving: set goals, budget, use interest-bearing accounts, automate deposits, reward yourself, use surplus funds, explore investments. |
| Make Lifestyle Changes for Saving | Embrace simple lifestyle changes to grow funds, cover expenses, and achieve long-term goals. Tools like Mint app can aid tracking and achieving goals. |
What you'll learn:
➤ Understanding Savings Terminology
Let’s get familiar with some important savings terms before we dive in:
Deposits
Deposits are the money you put into your savings account. This can include:
- Cash or check deposits in person
- Transfers made online
- Interest or profit added to your account by the bank
Starting Balance
When you open a savings account, your starting balance is the amount you begin with. Some banks require a minimum starting balance to avoid fees.
Ending Balance
Your ending balance is the final amount in your account at the end of a statement period. It’s what’s left after your planned contributions.
Monthly Contributions
These are the regular payments you add to your savings account each month. It’s part of your budget and savings plan.
Initial Investment
When you start your savings plan, this is the first amount you put in. It helps kick-start your interest earnings. Some banks ask for this to meet their minimum balance requirement.
Years to Grow
This is how long you let your savings plan work. It accumulates through your contributions and interest.
Compound Interest
It’s interest on top of the interest you’ve already earned. Some accounts offer it daily, while others do it less often. Even small contributions matter, so choose accounts that provide it.
Annual Interest Rate
This is the yearly rate at which your interest and fees are calculated.
Annual Percentage Yield (APY)
APY is the interest rate on savings accounts, including compound interest. It gives you an idea of how much you can earn over time.
Now that you’re familiar with these terms, let’s explore how to start saving money!
⬇️ More saving guides ⬇️
➤ Saving vs Investing: What’s the Difference?
As you learn about managing your finances, you might come across the terms “saving” and “investing.” They have distinct meanings, but it can be tricky to tell them apart, especially when you’re just starting to learn about saving for your future.
Let’s break down the differences between them:
Saving:
Saving means putting your money into a safe place where you can access it quickly. This builds your safety net for emergencies and big purchases, usually from your regular income like paychecks. When you save, your money grows slowly and steadily over time as you keep adding to it.
Investing:
Investing is about growing your wealth by putting your money into assets like stocks, bonds, and real estate. It can lead to significant returns, but there’s also a risk of losing money depending on how the market behaves. Many people also invest in real estate to increase its value or earn rental income.
Key Differences:
- Accessibility:
- Saving lets you access your money quickly from a checking or savings account.
- Investing might require selling assets to get your cash, which can take time.
- Risk:
- Savings accounts are often insured, so your money is generally safe.
- Investing involves more risk as the value of assets can go up or down.
- Returns:
- Saving grows at a slow pace, especially without much interest.
- Investing can lead to faster and potentially larger growth of your funds.
- Resources:
- Saving is a basic budget element, while investing is more of an optional expense.
For many, saving takes priority over investing, especially for building an emergency fund. It’s a solid starting point to secure your financial future.
➤ How Much Money Should You Save?
When you commit to saving money, setting savings goals becomes essential. While Chapter 5 delves deeper, let’s overview how to plan your savings amount.
Whether it’s a house or college fund, determine a personal savings rate. This rate is the portion of your income saved after taxes. For context, the U.S. monthly savings rate was around 6.4% in January 2022. Adjust this based on your goals, income, and expenses. Prioritize your basic needs.
Setting a personal savings rate helps with various objectives:
- Emergency fund
- Car purchase
- Vacation
- Mortgage down payment
- Retirement
- Investment
Different goals need different savings amounts. An emergency fund covers 3-6 months of expenses, while a home down payment needs more.
➤ Debt Payoff vs Saving: What’s the Priority?
Before saving, assess your debt. Paying off debt boosts financial responsibility and long-term savings. High-interest debt, like mortgages, student loans, and credit cards, can hinder saving.
Consider an emergency fund first, then tackle debt. Having savings safeguards against unforeseen expenses. This balance ensures you’re prepared while settling debt.
Factors to consider:
- Debt type: Prioritize high-interest debts like credit cards and personal loans.
- Personal priorities: Balance job stability concerns and mental weight of debt.
- Savings: Continue small contributions while repaying debt.
Choosing between debt payoff and saving depends on your situation. Reflect to find your best path forward.
➤ 10 Practical Ways to Save Money
Starting to save money can be tailored to your habits and priorities. Here are simple ways to kick off your savings journey:
- Budgeting for Groceries: Plan your grocery spending consciously by creating a budget. Meet essential needs and avoid unnecessary expenses.
- Use Budget Apps: Optimize expenses with budget apps like Mint. Understand how to achieve your saving goals by managing your budget effectively.
- Opt for Affordable Services: Explore cheaper cable or phone plans without compromising quality. Savings are possible without sacrificing service.
- Cut Excessive Subscriptions: Unsubscribe from unnecessary monthly services like streaming platforms or tech solutions. Reevaluate your payments.
- Reduce Energy Usage: Lower energy consumption to save on bills and reduce your environmental impact. Seasonal tips can help you make a difference.
- Limit Eating Out: Minimize eating out expenses by cooking at home. Homemade meals save money over time.
- Brew Coffee at Home: Invest in a coffee maker to trim daily coffee expenses. Use the saved money to build your emergency fund.
- Refinance Your Mortgage: Explore better interest rates for your mortgage. Refinancing could lead to significant savings.
- Plan Vacation Budgets: Enjoy vacations without overspending by creating a travel budget. Have fun without compromising savings.
- Start Small to Grow: Begin with manageable steps to build your savings. Start with approaches like the 52-week money challenge.
➤ 7 Tips to Supercharge Your Savings
As you begin your saving journey, consider these tips to elevate your efforts:
- Set Goals: Define short-term and long-term financial objectives for motivation.
- Include Savings in Your Budget: Allocate a portion of your monthly budget for savings.
- Explore Interest-Bearing Accounts: Move funds to interest-bearing accounts as your balance grows.
- Automate Deposits: Set up automatic transfers from checking to savings.
- Celebrate Milestones: Reward yourself for hitting savings milestones.
- Allocate Surplus Funds: Direct extra budgeted money to your savings.
- Consider Investments: Explore investment options as your savings grow.
Remember, making lifestyle changes can kickstart your savings journey. Preparing for the unexpected and achieving your goals becomes more attainable with each step. Utilize tools like the Mint app to track and achieve your savings goals effectively.
