One of the first lessons of saving money is to make it a priority. Instead of saving what's left over from spending, spend what's left over after saving!
We like to think we deliver nuanced and complex financial advice on the Financial Sense Blog each and every day. But since it’s National Financial Literacy Month right now, we decided it was time we got back to basics.
So come one, come all: Whether you’re a saving-tips-novice or a wizened saving wizard, and drink deep from the well of this saving advice.
Make it a budget priority.
Hopefully, you’ve built a budget for yourself. If you haven’t, then you might want to stop by our budgeting for beginners post first. While it can be really hard to make room in your budget for saving, it’s the only way to actually start the process.
You’ll have to take a look at your budget and figure out where you can make some cuts. Just apply that money to a section of the budget labeled “savings” and every month your savings will grow.
Of course, it’ll be even easier to stash away extra money if you’re earning extra money in the first place!
Direct new income to savings.
While it might be nice to get more spending money to use on fun things, it’s important to make sure your savings are covered first.
“The best way to use the extra money from a raise is to act as if you didn’t receive the raise,” suggested Robert R. Johnson, PhD, CFA, CAIA, and professor of finance at Heider College of Business at Creighton University. “That is, continue to live the same lifestyle you led before receiving a raise and invest the difference.”
“The most common mistake is that people let their spending increase commensurate with their new salary. For instance, people move into a bigger apartment or buy a more expensive car to reward themselves for receiving the raise. What happens is they are unable to improve their financial condition because they spend everything they make.
“People would be well advised to pay heed to Warren Buffett’s sage words: ‘Do not save what is left after spending; instead spend what is left after saving.’”
If you want to earn some money through an extra job or side hustle, check out this list of 10 great side hustles that are perfect for some fast cash.
Let the robots save for you!
If you have to remember to save, you might forget to save. So make sure you don’t have to even think about it.
“The best way to start saving is through automation,” recommended Money Elevation Coach Roslyn Lash. “Create a budget to determine how much you can truly afford. This should be an amount that will not create hardship so that you won’t regularly withdraw. Then, have those funds automatically deposited into your savings account. You’ll be surprised at how fast the money will accumulate.”
You can also consider the wide world of saving apps!
“One trick in helping to save is to use technology,” advised Johnson. “There are financial apps that help people save money. One popular app is called Acorn. You tie Acorn to your debit card and it rounds the purchase up to the nearest dollar, effectively allowing you to invest your spare change.
“So if your Dunkin Donuts coffee costs $2.47, when you use your debit card, three dollars will be taken out of your account with $2.47 going to Dunkin Donuts and $0.53 going into your investment account.
“This allows you to save money as you make everyday purchases and you don’t have to make the decision to invest the money. You will be surprised at how quickly your account balance builds. And with saving, like anything else, a little early success is contagious and you have started saving.”
You can also try using certain budgeting methods, like the Envelope Method, which comes in both high tech and low tech forms.
Choose the right savings accounts.
It’s not just about putting your money into a savings account. It’s also important to choose the right savings account.
“Saving money in a traditional savings account, or even worse, in cash, is a surefire way to lose buying power overtime due to inflation,” explained personal finance writer Dustyn Ferguson.
“To at least counter inflation, a high-yield savings account that offers around a two percent interest rate will ensure your money keeps its buying power over the years. You won’t earn a lot of money from a 2% account; however, a high-yield savings account is still super important because savings are normally for the future.
“And if you aren’t at a minimum protecting your money against inflation, your money won’t get you as much in the future as it will today. Plus, there is zero risk with high-yield savings accounts, which can’t be said for other places you could put your money, like stocks.”
Grow your money long-term.
Having money set aside for emergencies is great, but you’re also going to need money to support yourself in retirement. In order to do that, you’re going to have to invest it and let that money grow.
Johnson provided a helpful example of how some strategic saving right now, can help you out decades down the line:
“Suppose one receives a $5,000 annual raise early in one’s career. If you simply invest that $5,000 annually into an investment account growing at a 10 percent annual rate, you will have accumulated over $822,000 in 30 years. You will have invested a total of $150,000 and have earned $672,000 from those investments.
“And, lest you believe that a 10 percent average annual return is unrealistic, according to Ibbotson Associates, since 1926 the average annual return on a large capitalization stock index (think S&P 500) is 10%, while investments in long term government and long-term corporate bonds have on average grown annually by 5.5% and 6.1%, respectively.
“Why this is the best use of funds is because the vast majority of Americans reaching retirement age have very little saved for retirement. Estimates are that two-thirds of individuals approaching retirement won’t be able to maintain their standard of living because they have so little saved for retirement.
“Solving the retirement income crisis is not difficult—one simply must save early and often. Starting early is the key to successful retirement savings because of the effect of compound interest. Albert Einstein said that compound interest is the greatest mathematical discovery of all time. Time is the greatest ally of the investor because of the ‘magic’ of compound interest.
To learn more about the basics of saving, budgeting, and credit work, just sign up for the free personal finance courses were offering over at OppU.
Robert R. Johnson, PhD, CFA, CAIA is a Professor of Finance in the Heider College of Business, Creighton University (@CreightonBiz). He is also Chairman and CEO of Economic Index Associates, home to a new paradigm in Index investing. Dr. Johnson is the co-author of the books Invest With the Fed, Strategic Value Investing, Investment Banking for Dummies, and The Tools and Techniques of Investment Planning.
Roslyn Lash (@RosLash), the Money Elevation Coach, is an Accredited Financial CounselorⓇ, Real Estate Investor, and the Author of The 7 Fruits of Budgeting. She works virtually with single women helping them to gain clarity around their finances, reduce debt, and increase their net worth so that they can live a more abundant life. Her advice has been featured in national publications such as USA Today, Forbes, TIME, Huffington Post, Los Angeles Times, and a host of other media outlets.
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