Pay yourself
first.The easiest way to save money rather than spending it is to make sure
that that you never get a chance to
spend the money in the first place. Arranging for a portion of each paycheck to be
deposited directly into a savings account or a retirement account takes the
stress and tedium out of the process of deciding how much money to save and how
much to keep for yourself each month — basically, you save automatically and
the money you keep each month is yours to spend as you please. Over time,
depositing even a small portion of each paycheck into your savings can add up
(especially when you take interest into account) so start as soon as you can for
maximum benefit.
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To set up an automatic deposit,
talk to the payroll staff at your job (or, if your employer uses one, your
third-party payroll service). If you can provide account information for a
savings account separate from your basic checking account, you should generally
be able to set up a direct deposit scheme with no problems.
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If for some reason you can't set
up an automatic deposit for each paycheck (like if you support yourself with
freelance work or are paid mostly in cash), decide on a specific cash amount to
manually deposit into a savings account each month and stick to this goal.
Avoid
accumulating new debt. Some debt is essentially unavoidable. For instance,
only the very rich have enough money to buy a house in one lump sum payment,
yet millions of people are able to buy houses by taking out loans and slowly
paying them back. However, in general, when you can avoid going into debt, do
so. Paying a sum of money up-front is always cheaper in the long run than
paying off an equivalent loan while interest accumulates over time.
·
If taking out a loan is
unavoidable, try to make as big of down payment as possible. The more of the
cost of the purchase you can cover up front, the quicker you'll pay off your
loan and the less you'll spend on interest.
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While everyone's financial
situation differs, most banks recommend that your debt payments should be about
10% of your pretax income, while anything under 20% is considered healthy.
About 36% is seen as an "upper limit" for reasonable amounts of debt.
Set reasonable
savings goals. It's a lot easier to save if you know you have
something to save for. Set yourself savings goals that are within your reach to motivate
yourself to make the tough financial decisions needed to save responsibly. For
serious goals like buying a house or retiring, your goals may take years or decades
to achieve. In these cases, it's important to monitor your progress on a
regular basis. Only by stepping back and taking a look at the big picture can
you get a sense for how far you've come and how far you have left to go.
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Big goals, like retirement, take
a very long time to achieve. In the time needed to reach these goals, financial
markets are likely to be different than they are today. You may need to spend
some time researching the predicted future state of the market before setting
your goal. For instance, if you're in your prime earning years, most financial
commentators say that you'll need about 60-85% of your currently yearly income
to maintain your current lifestyle each year you're retired.
Establish a
time-frame for your goals. Giving yourself ambitious (but reasonable) time
limits for achieving your goals can be a great motivational tool. For example,
let's say that you set a goal of being on your way to owning a house two years
from today. In this case, you'd need to investigate the average home cost in
the area you'd like to live in and start saving for the down payment on your
new house (as a general rule, down payments are often required to be no less
than 20% of the purchase price of the house).[3]
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So, in our example, if houses in
the area you're looking at are about $300,000 apiece, you'll need to come up
with at least 300,000 × 20% = $60,000 in two years. Depending on how much you
make, this may or may not be feasible.
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Setting time frames is especially
important for essential short-term goals. For instance, if your car's
transmission needs to be replaced, but you can't afford the new transmission,
you'll want to save up the money for the replacement as quickly as possible to
ensure you're not left without a way to get to work. An ambitious but
reasonable time frame can help you achieve this goal.
Keep a budget. It's easy to commit to ambitious savings goals, but
if you don't have any way to keep track of your expenses, you'll find that it's
difficult to achieve them. To keep your financial progress on-track, try
budgeting out your income at the beginning of each month. Assigning a set
portion of your income to all of your major expenses ahead of time can help
ensure that you don't waste money, especially if you actually divide each
paycheck according to your budget as soon as you get it.
Record your
expenses. Keeping a tight budget is a must for anyone looking
to save money, but if you don't keep track of your expenses, you may find that
it's difficult to stick to your goals. Keeping a running tally of how much
you've spent on various types of expenses each month can help you identify
"problem" areas and adjust your spending habits to fit your budget.
However, keeping track of your expenses can require a serious attention to
detail. While everyone should keep track of major expenses like housing and debt
repayment, the amount of attention you devote to minor expenses generally
increases with the seriousness of your financial situations.
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It can be handy to keep a small
notebook with you at all times. Get in the habit of recording every expense and
saving your receipts (especially for major purchases). When you can, enter your
expenses in a larger notebook or a spreadsheet program for your long-term
records.
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Note that, today, there are many
apps you can download to your phone that can help you keep track of your expenses
(some of which are free).
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If you have serious spending
problems, don't be afraid to save every single receipt. At the end of the
month, divide your receipts into categories, then tally each up. You may be
shocked how much money you spend on purchases that are far from essential.
Start saving as early as possible. Money that's squirreled away in savings accounts
usually accumulates interest at a set percentage rate. The longer your money
remains in the savings account, the more interest you accumulate. Thus, it's in
your advantage to start saving as soon as you possibly can. Even if you're only
able to contribute a tiny amount to your savings each month when you're in your
twenties, do so. Relatively small amounts of cash left in interest-yielding accounts
for long periods of time can eventually accumulate to several times their
initial value.
Consider contributing to a retirement account. During the years when you're young, energetic, and healthy, retirement can seem so far away that it's almost not worth even thinking about. By the time you're older and begin to lose steam, it can be all that you think about. Unless you're one of the lucky few who stand to inherit serious wealth, saving for retirement is something you'll need to think about once you establish a stable career — the sooner, the better. As noted above, though almost everyone's situation is different, it's wise to plan on having about 60-85% of your yearly income available to maintain your current standard of living for each year that you are retired.
Don't get
discouraged. When you're having trouble saving money, it's easy
to lose your nerve. Your situation may seem hopeless — it may seem almost
impossible to save up the money you need to meet your long-term goals. However,
no matter how little you're starting with, it's always possible to
begin saving money. The sooner you start, the sooner you can be on your way to
financial security.
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If you're discouraged about your
financial situation, consider talking to a financial counseling service. These
agencies, which often operate for free or very cheap, exist to help you begin
saving so that you can meet your financial goals.
Remove luxuries
from your budget. If you're having trouble saving money, it's wise to
start here. Many of the expenses that we take for granted are far from
essential. Eliminating luxury expenses is a great first step to improve your
financial situation because this won't impact your quality of life or your
ability to perform your work significantly. While it can be difficult to
imagine life without a gas-guzzling car and a cable TV subscription, you may be
surprised how easy it is to live without these things once you remove them from
your life. Below are a just a few easy ways to reduce your luxury expenses:
- · Unsubscribe from optional television or internet packages.
- · Switch to a thriftier service plan for your phone.
- · Trade in an expensive car for one that is fuel-efficient and cheap to maintain.
- ·
Sell any electronic gadgets going
unused.
- · Buy clothing and home furnishings from thrift stores.
Find cheaper
housing. For most people, costs related to housing make up
the single biggest expense in their budget. Because of this, saving money
housing can free up a substantial amount of your income for other important
activities, like saving for retirement. While it's not always easy to change
your living situation, you'll want to seriously re-examine your housing
situation if you're having a hard time balancing your budget.
·
If you're renting, you may want
to try negotiating with your landlord for a cheaper rent. Since most landlords
want to avoid the risk that comes with looking for new tenants, you may be able
to get a better deal if you have a good history with your landlord. If need to,
you may be able to exchange work (like gardening or maintaining the house) for
cheaper rent.
Eat for cheap. Many people spend much more on
food than is necessary. While it's easy to forget to be thrifty when you're
biting into a gourmet meal at your favorite restaurant, food-related expenses
can become quite large if allowed to get out of control. In general, buying in
bulk is cheaper in the long run than buying small quantities of food .
·
Pick cheap, nutritious foods. Rather than buying prepared, processed
foods, try checking out the fresh food and produce aisles of your local grocery
store. You may be surprised how cheap it is to eat healthy.
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If you frequently go out to eat,
stop. It's generally much cheaper to cook a meal at home than it is to order an
equivalent dish in a restaurant. Regularly cooking your own food also teaches
you a valuable skill you can use to entertain friends, satisfy your family, and
even attract romantic interests.
Reduce your energy usage. Most people accept the price on
their utility bill each month without question. In fact, it's possible to
greatly reduce your energy usage (and thus your monthly bill) with just a few
simple steps. These tricks are so easy that there's practically no reason to
avoid them if you're looking to save money. Best of all, reducing the amount of
energy you use also reduces the amount of pollution you indirectly produce,
minimizing your impact on the global environment.
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Turn off the lights when you're
not around. There's no reason to leave the lights on if you're not in the room
(or in the house), so flip them off when you leave. Try leaving a sticky note
by the door if you're having a hard time remembering.
·
Avoid using heating and A/C when
it's not essential. To stay cool, open your windows or use a small personal
fan. To stay warm, wear several layers of clothing, wear a blanket, or use a
space heater.
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Invest in good insulation. If you
can afford to pay for a substantial home improvement project, replacing old,
leaky insulation in your walls with high-efficiency modern insulation can save
you money in the long run by keeping your house's warm or cool internal air
from escaping.
·
If you can, invest in solar
panels. As a serious investment in your own future (as well as the planet's),
solar panels are the way to go. Though the up-front cost can be quite high,
solar technology becomes cheaper with each passing year.
Use cheaper
forms of transportation. Owning, maintaining, and running a car can eat up a
large portion of your income. Depending on how much you drive, fuel can cost
you hundred of dollars per month. On top of this, your car will also cost you
in licensing fees and maintenance expenses. Instead of driving, use a cheap (or
free) alternative option instead. Not only will this save you money, but also
potentially allow you to spend extra time exercising and cut down on the stress
from your daily commute.
·
Investigate public transit
options near you. Depending on where you live, you may have a variety of cheap
options for public transit at your disposal. Most big cities will have metro,
subway, or streetcar lines running in and out of the city, while mid-sized
towns can have bus or train systems for you to use.
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Consider walking or biking to
work. If you live close enough to your job for this to be feasible, both are
excellent ways to get to work for free while simultaneously getting fresh air
and exercise.
Have fun for cheap (or free). While reducing your personal expenses can mean cutting frivolous luxuries out of your life, you don't necessarily have to stop having fun if you're trying to save money. Changing your leisure habits and recreational activities to more affordable ones allows you to strike the perfect balance between fun and responsibility.
Avoid expensive addictions. Certain bad habits can put a
serious damper on your efforts to save money. In worst-case scenarios, these
habits can become serious addictions which are almost impossible to defeat
without help. Worse yet, many of these addictions can be extremely hazardous to
your health in the long term. Save your wallet (and your body) the trouble of
going through these addictions by avoiding them in the first place.
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Don't smoke. Today, the harmful effects of smoking are well-known. Lung
cancer, heart disease, stroke, and a variety of other serious illnesses are
known to be caused by smoking
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Don't drink excessively. While a drink or two with friends won't hurt
you, regular heavy drinking can cause serious problems in the long run, like
liver disease, impaired mental function, weight gain, delirium, and even death.
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Don't do addictive drugs. Drugs like heroin, cocaine, and
methamphetamine are extremely addictive and can have a variety of seriously
harmful (even lethal) effects on your health and can be much more expensive
than alcohol and tobacco.
Save for an emergency fund. If you don't already have an emergency fund with enough money in it so that you can survive if you suddenly lose
your income, begin contributing to one immediately. Having a reasonable amount
of money stockpiled in a secure savings account gives you the freedom to
comfortably sort out your affairs in the event that you lose your job. After
you cover your essentials, you'll want to devote a chunk of your income to
building up this savings account until you have enough saved to cover about 3-6 months of living expenses
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