About 34% of Americans have less than $1,000 in their savings accounts. Although this number may come as a surprise, it is understandable considering the struggles of implementing healthy financial practices.
That’s why we’ve provided five steps to help you learn how to save money from each paycheck. And luckily, many of these money-saving methods don’t require drastic changes to your lifestyle.
Deciding how much of your salary to save is a personal choice based on your savings goals. As a result, there is no magic number that works for everyone.
For instance, you may never reach the point where you know how to save more than half your income. Unfortunately, this may not be a realistic goal. The amount you can save will largely depend on how much you make.
Typically, a good starting point is to save 20% of your monthly salary. However, if you have larger goals, such as buying a house, you may want to allocate more of your income to your savings account.
If you’re looking to manage your finances, we have you covered. Contrary to popular belief, you don’t need to make major cutbacks to save money from salary.
There are several ways to create a budget: you can use traditional pen and paper, an Excel sheet, or a budgeting app. Whichever method you choose, you’ll want to start by noting your monthly income and all expenses.
Your expenses can be categorized as fixed or variable. Fixed expenses stay the same every month like rent, insurance, phone bills, and car payments. Variable expenses fluctuate, such as groceries, electric and water bills, and gas.
When budgeting, you’ll likely want to allocate funds to fixed expenses first, as they will remain stable from month to month. Conversely, variable expenses can be cut if you are limited on funds or ask yourself how to budget money on a low income.
Once you outline your monthly budget, you can visualize how much you can realistically and comfortably contribute to a savings plan. Additionally, a budget can help you determine where you may be overspending. As such, you can actively cut back unnecessary spending and allocate your extra salary to savings instead.
It can be tempting to splurge or increase your monthly budget when getting a raise. Instead, this is the perfect opportunity to increase the amount you put towards savings. Rather than allocating 20% of your monthly salary, you can bump it to 30%. Ultimately, this can help you reach your savings goals faster.
It might sound counterintuitive, but getting home, renters, medical, or car insurance can go a long way in helping you save money from your salary. Additionally, having insurance can save you the trouble of dipping into your hard-earned savings or obtaining a high-interest loan during an emergency.
Many insurance companies now offer low monthly payments for home or renter’s insurance, often costing up to a few dollars a month. Additionally, they offer bundles for home and auto insurance that may help you get a better deal.
Unfortunately, medical insurance will likely be the most expensive cost. If your employer offers a sponsored healthcare plan, you may only need to pay a portion of the cost. However, if you aren’t offered employer-sponsored healthcare, consider state-sponsored healthcare coverage. Typically, these plans are more cost-effective than obtaining insurance privately.
Ultimately, medical insurance can save you hundreds or even thousands in the event of an emergency. As a result, this can spare you from having to obtain a high-cost loan that can potentially harm your credit or plunge you into debt.
If you already have insurance, compare policies to see if you can get a better deal with another company.
Finally, you may be wondering how to save money fast on a low income. Your best bet may be to look for areas in your budget that you can cut back on. There are three areas from which you can slash costs: food, bills, and housing.
In 2020, U.S. households spent $2,375 on dining out for the year. As a result, cutting back on eating out can save you a lot of money quickly, especially if you have a limited budget. While you’re limiting your dining out, you’ll likely also cut back on money spent on alcohol. Although this is a common way to treat yourself after a hard work week, the cost of drinks can quickly add up. Not only can cutting this help you put more money towards savings, but it can also help you lead a healthier lifestyle.
Instead of eating out, you can increase your grocery shopping trips and home-cooked meals. Meal prepping is a great way to learn cooking skills and come up with creative recipes. Additionally, your money goes a longer way when you buy in-season items and cook at home – allowing you to deposit the leftover cash in savings.
When making your grocery runs, always go with a list of recipes in mind. Also, avoid going grocery shopping on an empty stomach. This can save you from spending money on unhealthy snack foods. Additionally, opt for in-season items, generic products, or food you have coupons for.
As mentioned previously, if you already have insurance, shop around to find better deals on policies. You may be pleasantly surprised to find that you can save hundreds by switching phone, car insurance, or Internet providers.
Additionally, you may not have to cut back on the level of service you’re used to. Instead, some companies might have new customer promotions or discounts based on the area you live.
Unlike cutting back on bills and eating out, housing costs may be a little more difficult to reduce. Although an option, it might not be viable for everyone to move to cheaper housing. Instead, homeowners can consider refinancing their homes for a better mortgage rate and term. Ideally, you’ll want a lower rate that also comes with a shorter term. Be wary of lower rates with longer terms. Even though this might sound like a money-saving option, it is not.
Now that you’re familiar with some ways to save money from salary, you may wonder which savings account is best. While there are many money-saving accounts to choose from, the one you pick will depend on your personal savings goals. Here are a few options:
It won’t come as a shock that most individuals opt to save money in a regular savings account tied to their checking. This type of savings makes it easy for individuals to transfer money between accounts, offering free access to their funds. Additionally, basic savings accounts have low minimum requirements and are often free if you also have a checking account tied to it. Unfortunately, the interest rates on these accounts are low, meaning your money will grow at a slower rate.
These accounts are best for emergencies, as you aren’t barred from accessing your money. You should have the ability to transfer and withdraw your funds whenever and with no penalties.
This savings tool offers slightly higher interest rates than basic accounts. However, your money will be inaccessible for a set period. Also, the early withdrawal will incur a penalty, often resulting in the loss of interest. CDs are often used for long-term investments for larger expenditures, such as down payments for homes.
CDs are also safe investments because investors won’t lose their principal amount. Although the interest may fluctuate, your original amount is guaranteed.
These accounts are a hybrid between the two previously mentioned, offering the good qualities of both. Money market savings accounts have higher interest rates, around 2% to 3%, and are relatively accessible. These accounts are offered by your bank and are FDIC guaranteed.
Unfortunately, these accounts have a higher minimum investment amount, and the bank may limit monthly transactions. Nevertheless, money market savings accounts may be a good option for individuals looking to grow money long-term while retaining access to it.
Mutual funds are primarily used as long-term tools aimed at growing wealth. These accounts are riskier than the previously mentioned ones because you invest your money in the stock market. However, since your funds are spread over several sectors and stocks, they are also less risky than other forms of stock market investing.
Mutual funds are managed by professionals who invest money and manage your portfolio for you. Mutual funds allow for diversification because you are not investing your money in a single stock but spreading your funds over several. This can minimize your risk if one stock or sector experiences volatility. Additionally, having a professional handle your investments can be of great benefit to new investors.
However, keep in mind that mutual funds will likely be costly. Typically, the account manager will charge for their services, and you may be subject to other fees, such as:
Although it will take some extra work and conscious efforts, saving money from salary is possible and worthwhile. With a sizable nest egg, you can do away with monthly financial stress. You can also begin to accrue savings for future long- and short-term goals, such as buying a home or enjoying a vacation.