How to Save Money Consistently and Effectively
Making sure you set money aside for your goals and your family’s future.
If you’re like many Americans, saving money on a consistent basis may be a struggle. You may save sometimes, but it can be difficult to maintain a consistent strategy. You may also find that you’re one of those people who can save, but you end up spending it on things like big-ticket items and vacations, instead of really squirrelling it away for a rainy day.
The information below can help you develop an effective and consistent saving strategy that works for your budget. Keep in mind that a high debt load may prevent you from implementing or maintaining your saving strategy effectively. If you’re struggling with debt, give us a call at or complete a request for a Free Debt & Budget Analysis and a certified credit counselor will be in touch to discuss your options for debt relief.
Step 1: See what you should be saving
If you want to really be financially successful, most financial experts recommend that you should save about 10% of your income. That way, the amount you’re saving is proportional to your earnings. This is important because in general, people who make more have a higher cost of living, so they need a bigger financial safety net in case of emergencies and will require more money during retirement to live in the style they’re accustomed to living
With that in mind, if you only bring in $2,000 per month, then you should be saving about $200. But if you bring in $3,300 per month as a household, then $200 isn’t really enough; you should be setting aside about $330 every month.
So your first step to develop the most effective saving strategy is to determine what 10% of your income really is so you can set an accurate savings goal. First add up all of your income sources. This includes:
- Paychecks from all income-earners
- Any money earned from side businesses or freelance work
- Received child support and alimony payments
- Government benefits, such as VA or Social Security
Once you have your total monthly income, multiply it by 10% (0.1) to determine your target savings. As you’ll see below, this may not be what you end up saving initially when you first get started, but it should be the goal that you aim to achieve.
Step 2: Determine what you can actually save
In many cases when you first start out with a saving strategy, hitting the full target 10% of your income can be tough, but that doesn’t mean you should just give up on saving entirely. Instead, you have to start with what you can afford and then work your way up to the target as you bring your budget into balance and get comfortable setting money aside.
Start by reviewing your budget closely to see how much extra money you typically have left in your budget any given month once all of your bills and other necessary expenses are paid. This is known as “free cash flow” and it’s generally where your savings are going to come from. Ideally, your free cash flow will be more than 10% of your income, so you can set the full 10% you want to target aside and still have some cash available in case of emergencies.
Still, you may find that your free cash flow either doesn’t amount to 10% of your budget or exactly matches it. In either of these cases, setting aside the full amount you determined in your target may cause problems. After all, if you have no free cash flow, then you’ll end up dipping into your savings if you have an emergency.
So determine what you can comfortably afford to save and set this as your starting savings amount. Saving at least something is definitely better than nothing and also better that just leaving it to chance. You can always build to the full 10% target later.
Step 3: Ensuring you save
Now you know what you should save, but the next step is making sure it actually happens every month. You want to treat savings like you would any other financial obligation. Just like you owe money to your mobile provider, the utility company and your creditors, savings is the money you owe yourself. If you can get in the mindset that savings is a monthly obligation you pay yourself, it can help you get in the right frame of mind to save consistently.
The worst thing you can do is leave savings for whatever you have leftover on the last day of the month. This is a sure way to ensure you don’t end up saving anything or only save once in a blue moon. Instead, you need to look at your income flow (when you receive paychecks) what when things get paid to determine your best time to save. Then set a date that you will move money into savings and make sure that happens every month.
Having a separate savings account is important, because it ensure that the money doesn’t get spent. Keeping everything in one bank account can be problematic for maintaining your savings. In addition, you don’t get the benefit of the modest interest your money will earn in a savings account.
The other advantage of a separate account is that your bank may have a system that allows you to set up automatic transfers every month. This moves the money automatically so you don’t have to remember to set it aside. The more automated you can make the saving process the more likely you are to save consistently.
Step 4: Dividing your savings up for specific goals
The three steps above will help you start a consistent strategy for setting money aside, but you still need to determine where the money that you save will go. Your savings needs to be divided up between short, medium and long-term financial goals. Then you need to funnel the money in your savings into different accounts and assets that will help you achieve those goals.
Keep in mind that a traditional bank savings account will not earn money with interest added quickly. In fact, most savings accounts have an interest rate of less than 1%. As a result, your money doesn’t grow fast enough for everything your savings needs to support if you just leave it in your traditional savings account.
Instead, you need to find other types of accounts, securities and assets that you can invest your savings in to help you reach your goals. These may include:
- A money market account (MMA)
- 529 college savings plan
- Roth IRA or myRA
All of these after-tax saving engines can help you meet and achieve specific goals. They’ll also help you build wealth and giving you something to fall back on if you get into trouble.
So let’s say that you’re saving $300 per month and have one child that you need to send to college. Here’s one way you might divide your savings:
- Set up automatic withdrawals to put $100 away in a Roth IRA every month for your retirement
- Set up automatic withdrawals to put $50 away in a 529 college savings plan so your child isn’t as burden with student loan debt to get the education they need.
- With remaining $150…
o You maintain a $1,000 balance in your traditional account for emergencies like a car repair or trip to the ER
o You move the rest of the money into an MMA where it may not be as easily accessible or flexible (for instance, you have to maintain a high minimum balance), but where the money earns slightly more interest.
o At regular intervals once you generate a healthy sum of money, you take chunks of your MMA savings and move it into higher-interest-earning CDs, stocks and bonds.
Additional tips to help you save
The four steps above can help you develop an effective saving strategy, but there are plenty of ways you can sabotage your own success if you’re not careful. The tips below can help you ensure that your strategy works to get you where you want to be.
- Watch your debt-to-income ratio. This measures the amount of debt you have relative to your income. By checking your debt-to-income ratio regularly, you can ensure your debt load doesn’t start to eat up too much of your income so you have nothing left to save. When your debt load is low, it’s easier to save up the full 10% you really need.
- Keep credit card debt minimized. Following on the above, if you’re having trouble meeting the target 10% savings goal, one of the easiest ways to increase your savings is by decreasing your monthly obligation to your creditors. Each credit card debt you eliminate frees up more money to save. This way, you can reach your savings target without trying to cut all the fun and nice-to-have expenses out of your budget.
- Always save up for big purchases. People have a habit of dipping into their savings for big-ticket items like electronics and furniture – and that’s fine as long as you’re not draining your entire savings to do it. However, don’t spend your $1,000 emergency fund on a TV. Instead, save up specifically for the TV and purchase it once you have the money without taking your savings account down to zero.
- Maintain a sizeable emergency fund. This means always keeping your $1,000 emergency fund in your main savings account, but it also means building your financial safety net in case you face a challenge like unemployment. If you have at least 3-6 months of budgeted expenses set aside, you won’t be forced to dip into long-term savings like your retirement accounts or cash out assets just to stay afloat.
- Don’t be afraid to diversify. Words like “securities” and “stocks” may intimidate or scare you, but you can just be satisfied with the small growth you’ll get with a traditional savings account or MMA. CDs, stocks and bonds do have some risk and some restrictions on your access to your money, but it’s worth it to help you money grow in a way that actually benefits your life. If you’re not sure how to diversify, educate yourself on some basics about investing and reach out to an expert if you need help.
- Don’t touch long-term savings! Most long-term savings accounts like a Roth IRA or pre-tax 401(k) allow for early withdrawals if you’re willing to take penalties, but this is a recipe for disaster later in life. In most cases, you won’t put back what you took out and enough to cover the interest gains you lost. You could reach retirement and find you have to keep working or at least maintain part-time employment to get by.
Often, people dip into long-term savings accounts because they start to have problems with their debt or budget, but there are other (better) ways to deal with a debt problem so your savings don’t suffer. As soon as you realize that you’re starting to struggle, take action. The faster you identify a debt problem and determine the best way to deal with it, the less likely you are face the penalties and growth loss of early retirement withdrawals.
We’re here to help
If you have questions or would like a certified credit counselor to evaluate your debt and budget to help you bring balance to your financial life, give us a call at or take the first step online now by submitting a request for a Free Debt & Budget Analysis. We can help you overcome the challenges you face with debt so you can achieve stability and start saving the way you need to save to reach your goals.