How to Save Money
Steps to Saving Money Responsibly
1. Pay yourself first. The easiest way to save money rather than spending it is to make sure 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 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.
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. 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.
2. Avoid accumulating new debt. Some debt is essentially unavoidable. For instance, only the very rich have enough money to buy 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 overt 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. 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.
3. 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.
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 you'll need about 60 - 80% of your current yearly income to maintain your current lifestyle each year you're retired.
4. 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 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).
So, in our example, if house in the are you're looking at are about $300,000 apiece, you'll need to come up with at least 300,000 x 20% = $60,000, in two years. Depending on how much you make, this may or may not be feasible. Setting times is especially important for essential short-term goals. For instance, if your car's transmission needs to b 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, nut reasonable time-frame can help you achieve this goal.
5. 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 expense, 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 your major expenses ahead of time can help ensure that your don't waste money, especially if your actually divide each paycheck according to your budget as soon as you get it.