Between mass layoffs and talk of a potential recession, one thing remains certain: It’s never too late to start saving for the unexpected.
Inflation has stuck around with the Consumer Price Index rising 6.4% as of February from the year prior, according to data from the Bureau of Labor Statistics (BLS). Higher-priced goods means paying more for the same and can take a bite out of your discretionary income. Learning how to save money and manage the money you do have can put you in the best position for whatever comes your way.
If you’re among those who may be behind on building your nest egg, here’s how to get started.
- Understand your income and expenses
- Reduce your expenses
- Increase your income
- Automate your savings
- Manage your debt
- Build an emergency fund
- Invest in your future
1. Understand your income and expenses
Your ability to save is related to the gap between your income and your expenses. If there is no gap, you may find yourself living paycheck-to-paycheck or relying on credit cards to get by.
“In times like this, it is more important than ever to have a strong awareness of your cash flow. You must be mindful of what you are spending money on and how much you are spending,” says Gerald Grant III, certified financial planner, a financial professional at G Financial Group working in alliance with Equitable Advisors.
That’s why it’s a good idea to really look at your total income and expenses to see where you stand financially. For example, your net income is how much you’re able to take home after taxes. While you might think you earn a certain amount, looking at your earnings after tax gives you a better idea of what money you actually have to work with.
Your expenses include all the things you spend money on, big or small. This includes the three big expenses, which are housing, food, and transportation. Other key expenses include dining out, coffee, gym memberships, streaming services, insurance, subscriptions, and more. You may think you have a handle on your expenses but a lot can fly under the radar without you noticing.
“With credit cards, Apple Pay, and easy payments online, the thought process is being removed from spending money. It’s easy to tap, swipe or click to pay without much effort,” says Grant. “It’s important that you take the time to analyze how you are spending your money and the impact inflation is having on your day-to-day expenses. Every extra dollar you spend is a dollar you can no longer save or invest.”
Taking an honest look at these numbers can offer greater insight into your personal finances and help you budget based on real numbers.
A budget works by allotting specific amounts of money towards certain categories, so everything is accounted for. There are various types of budgets, but with all of them you want to track where your money is going so you can see if your budget is on target or needs to be adjusted. Having a weekly or monthly sit-down with your money can help you gain momentum and see things in close to real-time.
Some financial tools that can help you track expenses include:
- Empower (formerly Personal Capital)
- You Need a Budget (YNAB)
2. Reduce your expenses
If you want to save more money or start a savings practice but feel you can’t afford to, the place to start is reducing or even cutting any unnecessary expenses.
“The first action to reducing your expenses is to track your expenses and break them out between discretionary and non-discretionary expenses. It doesn’t matter how hard you try reducing your expenses, there are certain items that will never go away completely,” explains Grant, III. “You must eat, you must have somewhere to live, you need to get to and from work, etc. Therefore, you should spend most of your energy on finding ways to reduce those expenses you have more control over.”
To cut back on any unnecessary spending:
- Comb through all of your expenses
- Label each one as a need or want—either you need it to survive or you want it but it’s an extra
- Focus your attention on the “wants”
- Choose to reduce or cut out—for example, instead of dining out twice a week, you commit to once a week, or instead of coffee out every day, try out twice a week
- Put those extra savings into a savings account that earns interest
Focusing on the largest expenses such as housing, transportation, and food can give you the fastest results, but also may require more of a commitment.
For example, reducing housing costs may mean downsizing, opting for a roommate, or renting out a room on Airbnb. Reducing transportation costs can mean using public transportation when possible or walking or biking, weather-permitted. If that’s not an option, your best bet is to look for the most affordable gas prices using GasBuddy.com and shop around for the best car insurance rates.
Food costs can be reduced by buying whole foods and fewer packaged foods. Though buying packaged foods can also reduce restaurant or take-out spending on those nights you absolutely don’t want to cook, so you may not want to say no completely.
Also, buying certain staples in bulk could be cost-effective. When going out, you can look at menus ahead of time to choose a place that’s within your budget and see if there are any online coupons.
For utilities, you want to be comfortable but also be aware of how your electric, gas, heating, and cooling bills add up. When not in use, turn off the lights or turn down the heating or cooling if it’s not necessary.
You can also try to negotiate your bills, ranging from your rent, phone bills, internet, and more. If you want some extra help in that department, you can use a service like Trim, which helps negotiate or cancel subscriptions for you.
3. Increase your income
Reducing expenses is a great way to kickstart savings, but there’s a limit to what you can cut down on. At a certain point, you may have scrimped in every area possible and still find you’re not able to meet your financial goals. If you’ve hit your frugality limit or just want more breathing room in your budget, increasing your income is key.
There are several ways to boost your income:
- Side hustling. You can walk dogs with Rover or Wag, work in catering or events, do childcare or pet sitting, sell used items on Facebook Marketplace or OfferUp, and more.
- Freelance work. If you have a specialized skill set, such as writing, graphic design, photography, website design, etc. you can use your abilities to get freelance work. Advertise on social media and pitch your services.
- Gig work. There is no shortage of gig opportunities if you need cash right away. You can drive using Uber or Lyft, do DoorDash, UberEats, or Postmates, or get groceries using Instacart.
- Part-time jobs. You can look into part-time jobs that fit your schedule such as teaching fitness classes, customer service, data entry, transcription, and more.
- Negotiating your current pay. The best way to earn more without doing more hours of work is to negotiate your salary. Gather your accomplishments and measurable results and set a time to discuss your salary and ask for more.
- Get a new job. Some people have found that job-hopping is the key to earning more or changing fields entirely.
“I have also seen many people adopt side businesses to generate extra income, preferably something you enjoy such as photography, baking, or even leading yoga classes,” says Clint McCalla, certified financial planner at LourdMurray. “There are also sometimes opportunities for individuals to increase their earnings within their existing career through various incentives that many businesses offer for the sourcing of new employees or clients, or completing a new certification.”
4. Automate your savings
Remembering to save and putting in the work to save can be tough. The best antidote for this is to save money through automatic transfers from your checking account to savings and investment/retirement accounts. This removes the internal thought process and can help you build a savings habit, without much effort.
Make sure you’re getting the most out of your savings accounts by choosing one that’s earning you interest. “With many online savings accounts paying in excess of 4% on an annualized basis, consider moving excess savings away from financial institutions paying far less in interest,” says McCalla.
Set up an amount you feel comfortable with to set aside automatically. You can also request automatic payroll deductions to contribute to your 401(k), so you can slowly start to build a nest egg for the future.
Automatic savings can be powerful, but if your income goes up it’s time to reset your automatic savings as well. When earning more, you can fall into lifestyle creep and inadvertently spend more. So if you earn more, commit to saving and investing a higher percentage of your income. Maintaining your current expenses or increasing a small percentage can help you boost your savings rate.
To help keep lifestyle inflation in check, ask yourself what will make you feel secure in the long-run and not just in the short-term.
5. Manage your debt
Monthly debt obligations can affect how much you’re able to save for your future. On top of that, high-interest debt such as credit cards can grow at a rapid pace, making it difficult to pay back. According to the Household Debt and Credit Report from the Federal Reserve Bank of New York, credit card balances rose $61 billion as of Q4 2022, and that delinquency was on the rise for nearly all types of debt.
Focusing your efforts on paying off high-interest debt first can save you money in the long run. Credit cards can have APRs of around 18% or higher and paying only the minimum will make it tough to climb out, because of the added interest. This is a guaranteed way to save money on interest and once your credit card debt-free, you can focus on living within your means and saving more.
If you have a balance and a high interest rate on your credit card or other type of debt, you may want to look into debt consolidation. For example, if you have good credit you may be eligible for a balance transfer credit card. This allows you to transfer your balances from one card to another that offers an introductory 0% APR that can help you save money. Just keep in mind that a balance transfer comes at a cost though, as balance transfer fees are generally 3% to 5%.
“When it comes to high interest debt, the sooner you can pay it off, the better off you will be over time,” says Grant. “Folks often come to me looking to invest, while still carrying high-interest debt. Failing to realize that if the debt is costing you more than the investment is making you, it makes more sense to pay-off the debt prior to making any new investments.”
To reduce your current debt and avoid taking on additional debt:
- Focus on the highest interest debt as a priority (this is known as the avalanche method)
- Make more than the minimum payments if possible
- Any extra payments you make should go toward the highest interest debt
- Address the underlying cause—is the debt due to cost of living, low income, no savings, overspending, or a one-time medical issue?
- Remove credit card info from online websites so it isn’t too easy to spend
- Use cash or debit to avoid adding more credit card debt
- Consider working with a non-profit credit counseling agency if necessary, such as the National Foundation for Credit Counseling (NFCC) to help create a plan and get support
6. Build an emergency fund
An emergency fund can give your personal finances a solid foundation to stand on. No one is immune to sudden emergencies, such as an unexpected layoff, a sudden illness, car trouble, or a costly vet visit. Things will happen and having an emergency fund can help you deal with an already stressful time with more calm and stability. Plus, having that money can help you avoid or limit debt.
To start your emergency fund, open a high-interest savings account, like a high-yield savings account. If you want to avoid temptation, you can have it at a separate bank from where you keep your checking account.
Adding some friction to easy transfers can help if you’ve typically dipped into savings before. From there, start to build up the account with what you can afford every month. Eventually, you want to get about three to six months worth of expenses saved up. This is where automatic transfers can help. So every time you get paid, set an amount to transfer, whether it’s $10 or $100 or more.
And if you need to dip into your emergency fund, ask yourself if it’s truly an emergency. If it is, use the money without guilt or fear, and commit to building it back up.
7. Invest in your future
Paying off debt helps you now, an emergency fund helps you later, and investing can help you in the long-term future. Like most people, you probably want to retire one day or focus on some long-held dream.
That’s where growing your money through investing can help, as your returns can be greater over time (though it’s important to note there are no guaranteed investments and the market is always fluctuating).
“Long-term wealth can be created through investing, but it should be done carefully and wisely…Consider developing a diversified investment portfolio to minimize risk and maximize returns. The portfolio should be aligned with your values, financial goals, and risk tolerance,” explains Deeksha Susty Beeharry, CFA and portfolio risk manager at Inter Fund Management (IFM) SA, an independent and entrepreneurial asset management firm in Luxembourg.
Consider where you’re at now and when you might want to retire and also look into different retirement vehicles. “Utilizing tax-advantaged retirement accounts, such as 401(k)s, IRAs, and Roth IRAs, can be beneficial,” Susty Beeharry adds.
When opening a retirement or investment account, make sure to choose the investments so that your money isn’t simply sitting there but is actually invested.
Figuring out how to save money is a personal journey and one that can change over time, depending on your circumstances. It can be challenging and also rewarding and give you options down the road. The key is paying off debt, creating a solid emergency fund, and carving a path for retirement, even if progress is slow. That way you have more breathing room for life’s unexpected adventures.
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