If saving money was easy, everyone would be doing it. It isn’t easy. When you’re earning a low wage, it’s hard enough to make ends meet. You’ll always have to make rent and buy food, and there’s no shortage of other things to buy if only you had the money to buy them.
As your income rises, you can afford to be a little more generous with yourself. You might rent a bigger apartment or buy a newer car. You’ll eat out more often and treat yourself to a better phone. You’re earning more money but the month still feels longer than your pay.
High earners have the kind of expenses that make other people’s eyes water. The payments on a top-end car can cost more than many people’s rents. The cost of just running a big house can take a large chunk out of an average person’s salary—and high earners often have more than one house. Vacations suddenly have to be taken abroad, in five-star hotels, after flying business class at the very least.
Earning more doesn’t just open opportunities to save more. It also provides opportunities to spend more. What used to look like a luxury starts to look like a minimum, something you can’t live without. There’s always more to spend money on.
Your house can always be bigger. Or you can buy another one. Vacations can always be longer, more adventurous, and more luxurious. Clothes can always come with flashier labels.
People who don’t save believe that if they just had a little more money, they would save. They’re wrong. If they had a little more money, they’d spend more money. The ability to save isn’t directly connected to the amount of money you earn. It’s connected to your desire to save and your willingness to make the sacrifices needed to save.
Because saving requires sacrifices. It means being willing to put aside the fun that your money will buy now in favor of the greater security that your saved money will buy now—and the fun it will buy in the future.
Saving is a decision. It’s a choice you make today to plan ahead and prepare for tomorrow. It’s a smart choice that you don’t have to be rich to take.
As long you’ve got a roof over your head, food on the table, and clothes on yours and your family’s back, you can save. You’ll save more if you earn more, but you can still save even if you only earn a little.
How Much Should You Save?
So saving means making sacrifices. But how big a sacrifice should you make? How much should you restrict your life now in order to build security, or save for a big expense, or build your wealth for the future?
Save too much, and you risk living like Scrooge: hoarding your wealth, never spending it, and never enjoying the benefits that money can bring. Save too little and you lose your security. You live from pay check to pay check. You’re never able to make a down payment on a house or build wealth that can work for you.
There’s no right answer for everyone. It’s relatively easy to cut fat from your budget when your budget includes first class plane seats. It’s much harder when you travel choices are the bus or foot. But there is a formula that you can use.
In general, financial experts recommend a 50/30/20 rule.
Half your income should go on necessities such as rent and food. Thirty percent should be discretionary. You should save 20 percent.
So someone earning $50,000 a year after taxes would spend no more than $25,000 a year on rent and food. They would spend a maximum of $15,000 on shopping and entertainment. And they would save the remaining $10,000.
How hard you’ll find it to keep to that formula will, of course, depend on how much you earn. According to the USDA, the average American spent 9.5 percent of their disposable personal income on food in 2019 but the share varies considerably by income quintile. People in the lowest income quintile spend as much as 36 percent of their income, or $4,400 a year, on food. People in the highest quintile spend almost four times as much at $13,987, but that represents just 8 percent of their disposable income.
The definition of “necessities” and “discretionary” spending can very too. A car is a necessity for many, but not for everyone. Saving can take many forms as well. If your employer is paying into a 401(k) plan for you, then you’ll already be contributing towards that 20 percent savings rate, even if you can’t feel it. If your employer has a matching contribution plan then each additional dollar you put into your retirement pot will bring more of your employer’s money.
So one way to think about the amount you need to save is to think of a percentage of your post-tax income. Aim for 20 percent, including your retirement contributions. So if you’re earning $50,000 after taxes, you should be saving a total of $10,000 each year. Some of that money will be going into your pension pot before you’ve paid tax on it. The rest will be adding to the funds in your savings account.
Set a Goal
The problem with saving a percentage of your income is that your income can change. Sales people, for example, often work on a bonus structure. It’s too easy for them to save a share of their basic salary but treat the rest of their income as extras that they can enjoy. Those extras could well make up the bulk of their income.
But bonuses are also unreliable. Even the best sales people can go through dry patches, and average sales people can sometimes land a big deal that they never repeat. That unreliable income can make for unreliable savings plans.
An alternative approach is to set a financial goal. That’s easier to do if you know exactly what you’re going to use that money for. If you plan to save $50,000 for a house deposit, for example, you could calculate that putting aside $500 a month would take you 100 months, or just over eight years. Tighten your belt and double your saving rate and you could be in your own home in a little more than four years.
The vision of your target should help you to maintain your discipline.
But maintaining a savings discipline over the long term is always difficult, which is why financial experts often talk about short-term, mid-term, and long-term savings goals.
Short-Term Savings Goals
The aim of a short-term saving goal is to show that saving works. It’s a way to build confidence and motivation for longer-term savings. It also shows you that saving can be easy.
As we’ll see in the next section, tracking your budget is important, and it’s a good place to begin when you’re setting a short-term financial goal. When you can see that you’re spending four bucks each workday on a Frappuccino at the local Starbucks, then you can see that making do with the coffee machine in the office kitchen will save you $20 a week. That’s $80 a month in your pocket at the end of the month just by swapping expensive coffee for free coffee.
Add in the restaurant food you order three times a week instead of cooking up a simple pasta dish at home or dessert in the restaurant that you could easily skip. You could quickly find yourself with an extra $250 each month. That’s an instant pay rise for very little effort.
When you see that extra money, you’ll quickly see that saving really does have some important, positive consequences. You’ll also see that if you keep going, you can save even more and make a real difference to your lifestyle.
Most importantly, it won’t be long before you’ve built an emergency fund of a few thousand dollars. If you can use your short-term savings goals to save enough money to last a few months without pay, you’ll have a valuable degree of security. You won’t have to worry too much if you suddenly lose your job or find that you’re unable to work. Nor will you have to beg from friends or turn to family.
You will have time to get back on your feet, on your own.
Mid-Term Savings Goals
You should be able to see the result of a short-term savings goal within a few weeks. By the end of the month, you’ll find that you have more money in your pocket than you expected. After a few months, you’ll feel the confidence that comes with greater security.
At that point, you can start thinking about your mid-term goals.
These will vary from person to person. They’ll depend on your status and the financial position from which you start. Your medium-term goal might be to save enough to clear your student debts or make a down payment on a house. Or perhaps you’re saving enough to set up a business.
At this point, you need to do more than simply not spend more than you earn. You need to start putting your money to work. Those savings might be sitting unused for several years. That’s time that inflation will be eating into their value. You will need to protect them.
Later in this guide, we’ll talk you through the range of savings vehicles that you can use to store your savings but this is the time to start looking into them.
One of the biggest issues surrounding personal finance is that when you don’t have spare cash, knowing what to do with your savings feels irrelevant. It’s information that other people need—people richer than you. But when you do have savings, it’s too late. Inflation is already reducing their value and the opportunity cost of not investing them is reducing revenues.
It’s while you’re saving for the medium term that you can start to square that circle. As your savings build, start investigating different savings accounts and different investment vehicles. This is also the time to understand that saving vehicles have different maturation periods. The longer that you’re willing to lock up your money, the more interest you can expect to receive. But if you’re saving for a mid-term goal you won’t be able to benefit from all of the advantages available to long-term savings.
You won’t be able to enjoy the tax benefits, for example, that come from contributing to a 401(k) plan or an IRA. You also won’t be able to enjoy all of the returns that come from holding a bond all the way to maturity.
But you will be able to lock up your funds for a limited time, and enjoy some of the benefits.
Estimate how long it will take you to reach your mid-term goal—whether that’s a deposit for a house, or a fixed sum to open a store. As you put money aside each month, remember to invest that money for a period no longer than the date of that goal. You should find that your savings grow faster, and you reach your goal sooner.
Long-Term Savings Goals
When financial advisors talk about long-term savings goals, they’re usually talking about retirement. They’re referring to the day you close your last folder, hang up your keyboard, and swap days in front of a screen for time with the family, on vacation, and enjoying your life.
That’s hard to think about when you’re just starting your career.
Retirement will still be decades away, and who knows what will happen between then and now? Do you really need lock up your money for 30 or more years? Maybe you won’t need it then. Maybe over the next few years, you’ll launch a successful business or land a high-paying job or win the lottery. If you strike it rich between then and now, you’ll have locked away money you need today to benefit a time when you don’t need it.
We all hope that at some point between our first job and our last day at work we’ll hit the jackpot. Google will buy the company for a truckload of stocks. Royalties will pour in from patent licenses. Salary and bonuses will hit seven figures… and keep going.
But that’s not something that anyone can rely on. And planning your finances in the hope that “something will come up” isn’t just a poor decision. It’s also a very expensive one.
The biggest benefit of a long-term savings goal is the effect of compound interest. The money your money makes makes money too. The longer you leave the money locked up, the more compound interest it earns, and the more work it does for you.
Start saving $500 a month when you’re 25 years old, and by the time you’re ready to retire at 65, you’ll have saved $464,687 at an interest rate of just 3 percent. The $240,000 of income that you’ll have saved will have earned an additional $224,687, an average $5,617 a year.
Start ten years later, though, at 35 instead of 25, and by the time you’re 65, you’ll only have $292,596. Your $180,000 will have earned $112,596, an average of just $3,753 a year.
The earlier you start saving for those long-term goals, the more your money will work for you. Not only will you have bigger nest-egg at the end, you’ll also have needed to save less to get it!
Even if you have a plan to get rich before retire, you should still be putting away money to meet your long-term goals. You should start making those savings as early as possible.
3. Track Your Spending
In order to save for any goal—short, medium, or long-term—you’re going to need data. You need to know how much money you have coming in, and how much money you have going out.
You’re also going to need to know where that money’s going.
Tracking Your Income
If you’re salaried, tracking your income should be straightforward. Your payslip will tell you how much you’ve earned gross, and how much you’ve received net of taxes. You’ll also be able to see if you’ve made any automatic contributions towards your retirement pot.
It’s certainly possible that you’re already making some long-term savings, and you don’t even know it!
But not everyone earns the same amount of money each month. Restaurant staff rely on tips. Salespeople earn bonuses. For freelancers, no two months are ever the same. If your income is irregular, look back over the last twelve months and work out your average monthly income.
That’s the money you can expect to earn each month over the next year. It’s the sum from which you’re going to have to pay for your expenses and still put money aside for the short, medium, and long-term.
Identify Your Fixed Expenses
Once you’ve calculated your average monthly income, you can start calculate your outgoings. These will leave you in two ways.
Fixed expenses are the same—or almost the same—every month. They’re your rent, your car payments, your Netflix subscription, and so on.
Make a list of each of those payments.
You might be surprised at how many fixed expenses you have. Some will be necessary. You always need to pay your mortgage or your rent. You’ll need to pay for your car and health insurance. If you’ve got student loans, you’ll have little say in whether you can cut that expense or not.
But other fixed expenses are more flexible. You might even find that you’re still paying for subscriptions for items that you no longer use—or use very rarely. Gyms, for example, rely on the assumption that people sign up at the start of the year, stop attending by about March but continue paying their subscription. According to one statistic, more than two-thirds of gym memberships remain unused. That’s almost $60 wasted every month.
And because the price of your gym membership leaves your bank account automatically, you don’t even notice it.
A subscription can be a very convenient way to pay for things you use all the time. But it can also be a very expensive way to pay multiple times for things you don’t use at all.
When you draw up your list of fixed expenses, divide them into essential expenses and “discretionary” expenses. This second category consist of fixed expenses that you could end without seriously affecting your life.
So your list of fixed expenses might look something like this:
|Essential Fixed Expenses||Discretionary Fixed Expenses|
|Health Insurance||Netflix Subscription|
|Home Insurance||Audible Subscription|
|Car Insurance||Xbox Game Pass Fee|
|Student Loan Payments|
If you’re looking to reduce your outgoings, you can see that some of these expenses would be easier to change than others. It’s easier to cancel an Audible subscription or downgrade a Netflix subscription, and save ten or fifteen dollars a month, than it is to move to a smaller apartment or give up your car.
But those discretionary fixed expenses are often fairly small. It’s the essential fixed expenses that will often make the biggest difference to your outgoings but will also cause the biggest disruption to your life.
Until you can see where your money is going though, and how it’s leaving, you can’t start planning how you’re going to make your cuts.
In addition to your fixed expenses, you’ll also have variable expenses—and these are harder to calculate.
Each month you’ll spend a different amount on food, clothing, and entertainment. Some months are just more fun than others.
Other months, though, are more expensive than others. Vacations, for example, are expensive but they rarely happen more than once or twice a year. Friends’ weddings can mean pricey gifts. Computers grind to a halt every few years, and that winter coat you thought would last a decade might be painfully out of fashion much earlier than you thought.
That’s why to calculate variable expenses you need to look over twelve months and take an average of each type of expense. It’s going to take a while.
Start by listing your biggest kinds of kinds of variable expenses. They’re likely to include:
- Dining out
- Household goods
That won’t cover everything. Inevitably, you’ll have spent money on things you’ll struggle to categorize. You can add another category for miscellaneous items.
Next, pull up your credit card bill and print out each month’s list.
Using a different colored highlighter for each category of variable expenses, mark your outgoings. By the time you’ve finished, you should have marked each line in each of the last twelve credit card bills.
Count the amount you spent over the last twelve months on each category of goods and divide by twelve to produce a list of monthly averages.
Clearly, you could simply add up the total credit card bill at the end of each month, and generate an average of your total expenditures. That’s worth doing too. But you want more detail than an overall picture of your outgoings. You want to see where you’re spending the most money so that you can see where you can make the easiest savings.
If you’re spending a large amount of money on dining out, for example, then count the number of times you eat in a restaurant each month. Take the average cost of each meal, and you’ll see how much you’d save on average each month if you ate at home one extra meal each week.
Or if you see that you’re spending more than $100 a month on clothes each month because you need to dress well for work, you could consider a subscription to a service like Rent the Runway, a kind of Netflix for clothes.
It’s also easy to forget the effect of those rare but big expenses that can take a big chunk out of your bank account, like foreign travel. Those are big treats but because they don’t turn up in your credit card bill each month, they’re easy to forget. You might also dismiss them as too rare to think about. But if you take a foreign trip each year, that’s a regular expense that you need to keep in mind.
You can’t make choices about what to cut until you can see where your money is going.
Plan Your Cuts
So now you’ll know your average income. You’ll have a list of your fixed expenses and a list of your variable expenses. If your income is higher than your total outgoings, you’re already saving. You’re living within your means.
But that doesn’t mean that you can’t save more. A few cuts here and there could make a big difference to your savings rate. It could allow you to enjoy better vacations, or an earlier retirement. Dropping a few variable expenses might be just what you need to buy your home sooner than you expected.
And if you’re not earning more than you’re spending then you will have no choice about making those cuts. You can’t save if you spend more than you earn.
Start with your variable expenses—and with the easy options that let you maintain as much of your current lifestyle as possible.
Collect Discount Codes
One simple option is to clip coupons. That used to mean literally cutting coupons out of magazines. These days, it’s much easier. There are plenty of websites that offer easy discounts on a wide range of items. Even Amazon has an entire page offering money off products you can buy on the site.
Before you make a purchase, get in the habit of searching the Web to see if you can find a coupon that will let you save a few bucks.
The search might take a few minutes but it should also be fun. There’s a kick in paying less than other shoppers because you took the initiative to search for a discount.
But be cautious. When you’re looking for coupons, it can also be tempting to load up on items you don’t need because you can see they’re going cheap. Use the discount coupons to lower the cost of products you were going to buy anyway. Don’t use them to increase your spending on items you don’t really need.
Shop with a List—and After You’ve Eaten
One way to ensure that you’re not buying what you don’t need is to make sure that you always shop with a list. Take the time before you go online or head to the store to write down everything you need. There’s no shortage of apps that you can put on your phone and that will keep your list in order. They’ll also ensure that you don’t have to write the same items each week. They can even arrange your goods by category so that you can buy what you need as you’re standing in each department.
Instead of pulling items off the shelf and dropping them into your basket, you’ll only choose the things you know you want. You’ll be less at the mercy of the marketing messages on frozen pizza and chocolate bars, and you’ll find it much easier to keep to your budget.
It’s also a good idea to buy your groceries after you’ve eaten—and not just because you might buy more food. You could end up buying more of everything.
It’s not entirely clear that shopping while hungry does inspire people to load up on more food. One study that found that hungry grocery shoppers buy high-calorie foods has been retracted. But it sounds reasonable. It’s certainly going to feel harder to resist those chocolate impulse buys next to the cash desk if your stomach is rumbling.
But other studies have found that shopping while hungry does make people buy more non-food items. In one study, researchers asked 81 customers leaving a large department store to complete a survey. The survey included a question that asked participants how hungry they were. They also scanned the receipts of their purchases.
The study found that the hungry shoppers spent 64 percent more than the less hungry shoppers. They had also bought more non-food items.
Being hungry while shopping creates a craving for all sorts of things. So before you head to the mall make sure that you know exactly what you want to buy—and that your stomach’s full.
Unsubscribe from Marketing Emails
You can do it without even thinking. You reach a website and a pop-up blocks the page and asks for your email address. It might even offer you something in return: a free e-book, for example, or perhaps a discount on your next purchase.
All you have to do is agree to receive the company’s newsletters occasionally in your inbox.
You like the company and you want to hear from them, so you sign up. If their communications become too annoying, you think, you can always unsubscribe.
The result is that you open yourself up to a steady stream of marketing messages. And those messages work. According to one reported study, email marketing is up to 40 times more effective than social media marketing and works three times as fast. You’re getting targeted ads delivered right to your inbox.
Smart email marketers also track how you react to those emails. If you read the email or click a link, even if you don’t buy, they’ll send you more messages that you do like. There’s a good chance that eventually, you’ll buy something you really don’t need.
The more email subscriptions you collect, the greater the likelihood that you’ll spend outside your budget.
Take the time to look through all of your email newsletter subscriptions. Recognize that those emails aren’t just there to inform you. They’re there to sell to you. They’re advertising tools targeted at your preferences designed to persuade you to buy. Unsubscribe from all the lists you aren’t genuinely interested in reading.
Know Exactly How Much You’re Paying
Retailers have a host of different tricks to make it easier for people to buy. Many of those tricks involve hiding the price of their goods.
That doesn’t mean that they don’t put a price on them. They just make the price look deceptively low and easy to pay. An Apple iPhone 12 Pro, for example, costs from $999 in an Apple Store. That’s a lot of money for a phone. It’s the kind of payment that leaves a big hole in your savings and hurts to hand over.
Buy the same phone from AT&T, however, and you can pay just $30.56 a month. That’s much more affordable. It’s less than you’d spend on a night out with friends for the latest top-end smartphone. It feels like an affordable way to use something you otherwise wouldn’t be able to afford. Over 36 months, though, you’ll have paid $1,100—a hundred bucks more than if you had shelled out a single payment. And you’ll have to add tax to those payments too.
Sometimes, pricing can be lower than it appears. The sticker price of a 2021 Ford Explorer, for example, starts at $32,925. That’s an eye-watering amount of money that few people can afford to pay out of pocket. But auto dealers recognize that they won’t sell many cars if they expect buyers to write a check for the full amount before they hand over the key. They offer a host of different financing options.
The sticker price allows buyers to compare the final price of different makes and models. But it says nothing about the actual cost of owning—or using—the car.
To calculate that cost, you’ll need to know the size of the down payment you have to make, the amount you have to pay each month (including interest payments), and the duration of the loan.
So imagine you’re buying a new car with a sticker price of $35,000. You have to make a down payment of $5,000 and monthly payments of $350 for 36 months.
A deal like that feels as though you’re only paying $350 a month to drive the car. But that excludes the down payment. In fact, at the end of the three years, you’ll have paid $12,600 plus the initial $5,000. That makes a total of $17,600. The monthly payment, including the down payment, will have been $489.
But as you come to decide whether you want to buy the rest of the car or trade it in, remember that you’ve actually paid less than $489 a month. You’ll have paid about half the price of the car but the car is likely to have retained about 80 percent of its value. Sell the car and you’ll receive 80 percent of $35,000—or $28,000. You’ll need to pay the seller the remaining half of the car’s initial price, or $17,400. That gives you another $10,600.
In addition to paying for the use of the car you’ll also have put money into it that you can later take out. Using that car for three years will actually have cost you $7,600—or just $211 a month.
The aim of leasing is to ensure that buyers pay little more than the depreciation cost of the vehicle.
Whenever you’re buying something with a long-term loan or on a lease basis, it’s worth calculating exactly how much you’re paying each month to use the item. You might find that you’re paying much more than you think, and that there are cheaper ways to get the same service.
And sometimes, you can find that the service is more affordable than you thought.
Counting Your Costs
Most of the money you spend each month will be clear and easy to calculate. Your gym membership and cable fees rarely change. Rent should be the same from month to month.
Other expenditures change more often. Energy expenses rise and fall with the seasons: you might ramp up the air conditioning in summer, drop it in fall, then turn on the heating in winter.
And some costs change from week to week. Some periods are just more entertaining—and more expensive—than others.
What you cut will depend on you, and on your priorities. You’ll have to choose whether you should cut back on eating out or cancel your gym membership. Or even move to a small apartment to save on rental costs.
But as we’ve seen, until you know what you’re spending, you can’t decide what you’re cutting.
Remove Your Debt
As you count your costs, you might find that you’re surprised by how much you’re spending. Small expenses made often quickly build up.
But there’s one expense that’s hard to see and is likely to be your biggest financial drag: credit card debt.
Credit cards are invaluable. They’re vital ways to pay for almost anything you want to buy online. They ensure that you don’t have to carry around cash everywhere. They can give you points that you can trade for discounts and even flights and hotel stays. And they give you credit. They let you buy now and pay when you can.
That credit, though, is expensive. Interest rates typically start at around 15 percent each year. Run up $1,000 on your credit card, and roll over that debt for a year, and you’ll have added at least $150 to your debt.
That $150 then runs up its own debt so that the amount you owe can very quickly run out of control. The average American family owes $6,270 in credit card debt. That means that the average American family is liable for at least $940 in annual expenses to credit card companies.
The first thing you should do when you’re looking to save money is to pay off your credit debt. Remove those large interest liabilities. Stop paying credit card companies their giant sums for the privilege of using their money.
Once you’ve paid off that debt, you should get into the habit of paying the balance off entirely every month. Borrowing from credit card companies is one of the most expensive ways to obtain credit.
That doesn’t mean you should never borrow money. Businesses borrow to invest; they use money from the bank to make more money in the future that covers both the debt and its interest. Store credit can help you to enjoy a purchase now instead of when you can afford it in the future.
But always check the annual premium rates, or APR, so that you know exactly how much you’re paying. Check to make sure that you can’t borrow the same amount more cheaply elsewhere.
And be certain that you can’t wait to buy the product now, instead of waiting until you’ve saved enough to pay in cash.