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Rangely Garcia / Money

Across all personal finance websites, magazines and books, whether you listen to a big-wig guru or consult with a financial advisor, the most common advice you’re bound to hear is “save your money!”

It’s not because anyone thinks you should sit on a pile of cash and never touch it, but because it is impossible to achieve any major milestones without saving money ahead of time.

How to Start Saving Money

It’s never the wrong time to begin working toward your savings goals, but knowing how and where to start can be the most challenging part.

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Start by Budgeting

The first step is understanding where your money is currently going — and finding areas where you can trim the fat by making a budget and sticking to it.

Some people prefer going old-school by actually opening up their bank statements and manually writing out each purchase or tracking them on a spread sheet, and then comparing the totals to their monthly after-tax income. Another option is to get high-tech by using an automated financial tracking service like Mint or You Need a Budget (YNAB), where you can link your checking accounts and credit cards to your budget so that every purchase you make is automatically counted.

Budgeting is a great first step towards saving more money, but what's your ultimate plan for the money you’ve saved? And how can you motivate yourself to be diligent and save more? Many savers find that it's very important to set clear financial goals and save for specific expenses down the road — a down payment on a home, a college fund for your kids, a vacation to Hawaii, a season's worth of holiday gifts for the family, and so on.

“You have to ask yourself what you are saving for and when is this money going to be drawn on,” says John Pilkington, CFP, senior financial advisor with Vanguard Personal Advisor Services.

Build an Emergency Fund

If you’re brand new to saving money, your first move should be to build an emergency savings fund.

Ideally, an emergency fund should cover three to six months worth of “non-discretionary spending,” meaning a combination of your fixed payments like rent or mortgage, plus the average monthly cost of bills, groceries, transportation, and other unforeseen but inevitable expenses. Basically, the total cost of all of your “needs” and none of your “wants.”

As for where to put that money, a high-yield savings account is your best option because the interest they accrue is typically higher than a normal bank account. An online savings account is also easily accessible but not so easy that it will be tempting to pull from and spend on non-necessities. A great option is Ally’s high-yield savings account which pays 0.6% (as of November 2020), has no monthly service fees, and is completely online — which can help you avoid the temptation to pull out any cash impulsively.

Your goal should be to put around 10% of each paycheck into your emergency fund until it’s fully funded — but any amount higher than zero is good. An easy way to start getting in the habit of saving is to automatically send a manageable percentage of your income to a high-yield savings account, and then set targeted goals of increasing the savings amount every few months. For example, you could reroute 3% of your monthly income into a savings account, then increase it to 6% in three months, and then up to 10% three months after that. Of course, depending on your income and budget, you might be able to consistently save more than 10% and build up your emergency fund more quickly.

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Save for Retirement

Do you work full-time? If so, it’s likely you have access to an employer-sponsored retirement plan, usually a 401(k) funded with pre-tax dollars or a Roth 401(k) funded with post-tax dollars. If you’re not currently contributing, you could basically be giving away free money. That's because, in many instances, employers will offer a 401(k) match up to a certain percentage. The average was around 4.7% as of last year — meaning that if you deposit at least 4.7% of your paycheck into your 401(k), your employer will also deposit an amount equivalent to 4.7% of your pay as well.

Maxing out your employer’s match is an easy way to multiply your money and save for retirement.

“Two-thirds of Americans with available 401(k) matches don’t take full advantage of that match,” says Pilkington.

You can allocate more of your pay beyond the employer match to your 401(k), of course, though the maximum amount workers under 50 can contribute for 2020 and 2021 is $19,500. People over 50 are allowed an additional $6,500 a year in "catch-up" contributions.

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For those who don’t receive a 401(k) through their employer, or who work as an independent contractor or are self-employed, the best option is an Individual Retirement Account (otherwise known as an IRA). Within this category, there are two options: 1) a traditional IRA, in which the money remains untaxed until you begin pulling it out no later than age 72; and 2) a Roth IRA, which is taxed now as opposed to later, making it the better choice for people who expect to make more money as they get older. (This is because you'll be in a higher income tax bracket as your earnings rise, and it's cheaper to settle your obligations with Uncle Sam when your tax rate is lower.)

Pilkington notes that the Roth IRA is more flexible than a regular retirement fund as well: “It’s an excellent vehicle to save for retirement while also having the liquidity to draw from for a big purchase like buying a home.” This is because you can withdraw your contributions at any time without penalty, since you've already paid taxes on that money. (To withdraw any earnings from those contributions made in the stock market, in most cases you'll have to wait until age 59 ½.)

While it can be frustrating that you can't touch this money for decades, it's incredibly important to make this investment in your future self and the lifestyle you want to have as you age.

Begin Investing

If you are able to pay your bills, and you've already built up an emergency fund and are maxing out your employer’s retirement match, you may be lucky enough to have some money left over at the end of each month. This is when investing can help boost your saving strategy.

There are many different ways to invest. In fact, if you’re making contributions to a retirement plan, then you’re probably already participating in an investment fund of some sort. While investing is most commonly associated with purchasing and trading individual stocks, most beginners find it easier — and much, much safer — to get started with mutual funds or exchange-traded funds (ETFs). Your 401(k) or IRA, if you have one, will have a menu of different investments that probably includes a target-date fund, which is a mutual fund whose manager adjusts the mix of stocks and bonds as you approach your target retirement year.

You can buy a mutual fund — essentially a bundle of stocks overseen by a fund manager — at a brokerage firm like Schwab or Fidelity or directly from the fund company itself. Most financial planners recommend index funds, which aim to replicate the performance of the stock market as a whole, rather than active funds which employ a portfolio manager attempting to pick winning stocks. If you do want some hand holding, so-called robo-advisors use computer algorithms to help match you with a portfolio of index funds, based on factors like your age and risk tolerance.

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One thing to remember: While investing is the best way to boost your savings and increase your wealth in the long run, you can lose money and must be willing to tolerate down periods in the stock market. Be sure you have a savings horizon of at least three years, and preferably longer, before you get started investing.

Easy Ways to Save Money

There are all sorts of tips and tricks that experts swear by to help people save more. No single strategy works for everyone, and sometimes an approach may even backfire. Ultimately, it depends on what works best for you. Here are some popular ways to save, backed by financial advisors and consumer psychology:

Automate Your Savings

Want to save money without even thinking about it? Then remove yourself from the equation, so that you don’t even even see your latest savings allotment on payday.

Many employers allow employees to split up where their paychecks are divided. For example, you could fill out paperwork with your company to direct 90% of your paycheck to your checking account and 10% to a savings accounts — perhaps even one that you keep at a different bank. Alternately, if your paycheck can only be deposited to one spot, you can set up automatic transfers online from your checking account to a linked savings accounts on payday, even if they’re on different banking platforms.

“Automating helps you behaviorally condition yourself to not think of that as spendable, consumable income,” says Pilkington.

Pay Down Debt

Some people will tell you paying off debt should be your primary goal before you start focusing on saving money. While it’s true that high interest debts like credit cards or payday loans require more immediate attention — especially if you’re behind on payments — it's not urgent to pay off all debt asap.

Some debts like federal student loans and mortgages are considered “good debt”: They have low interest rates, don’t hurt your credit score, offer tax benefits, and ultimately help you build wealth. If you aggressively pay down “good debt” to the point that you have little or no savings, you run the risk of major turmoil if you run into a financial emergency. Your focus should be on paying off high interest debts monthly and in full.

“Paying down higher interest rate debt gives people a guaranteed return,” says Pilkington.

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Break Your Savings Goals Into Bite-Sized Pieces

Saving $1,800 in one year for an emergency fund when you’re starting from zero is a daunting task, to say the least. Breaking it down to saving $150 each month can help you breathe a bit more easily, but that still may seem like a decent chunk of change. However, when you break it down even further, you find that $1,800 in one year is just $5 a day — which probably seems much more doable.

Researchers from the University of California, Los Angeles and the University of London found that it’s easier for people to save money when they break it down into daily contributions.

You can contribute a daily amount of $5 or include it as a daily $5 transaction in your budget, so that the savings isn't available for you to use on anything else. This approach doesn’t change the amount you’re ultimately saving, but it can help you stay on track for long-term goals.

Reduce Your Monthly Bills

In the age of the internet, subscription fees are unavoidable: streaming services, news sites, meal kit delivery plans, take out apps, grocery delivery programs ... the list goes on. Add all of those fees on top of your regular monthly bills, and the total can quickly eat up a huge part of your paycheck.

Take a hard look at where your monthly payments are going (which should be easy since you’ve been tracking them in a budget). Are there any subscriptions you just don’t use enough to be worthwhile? If you never watch anything on Hulu or end up throwing away half of those pre-made dinners, it’s time to cancel your subscriptions and free up some more money to save.

Another way to reclaim some cash is to contact all of your monthly service providers and ask for a better deal. Your internet, cable, and phone bills are entirely negotiable, and you might not even have to change your cell phone plan or lose access to the premium cable channels to catch a price reduction. Simply call the customer service line of your provider, request to be put on a call with the retention and cancellation department, and ask for a lower price in a firm but friendly way.

Earn Cash Back When You Shop

Did you know you can make money while shopping online or at grocery stores? There are two main ways to do it:

The first is using an online shopping portal like Rakuten whenever you need to make a purchases. You can either go directly to the Rakuten website, search for items you're looking for, and then click through to the sites offering the best rewards for users or you can download the Rakuten browser extension, which notifies you of the cash back offers available when visiting different websites. As you earn rewards, you can cash them out as quarterly checks.

The catch with sites like these is that you have to do your due diligence: focusing exclusively on getting cash back can mean you miss a less expensive option that doesn't give you cash back. It's also important to only use cash back sites for needs, not wants. If you're not cautious, it's easy to wind up buying random things you don't need.

The other option is using a cash-back credit card. Credit cards sometimes get a bad reputation in the personal finance industry because they can quickly saddle consumers with debt if they're not careful. But if you always back your balance in full each month (and you should!), then it's wise to take advantage of generous credit card rewards programs.

Buy High Quality Items

Have you ever heard of the “Boots” theory of socioeconomic unfairness? In Terry Pratchett’s 1993 novel Men at Arms, the character Sam Vimes explains that one reason rich people are wealthy is because they spend less money over the long haul. He says that a rich man can spend $50 on boots that will last for years, meaning he never has to buy another pair. On the other hand, a poor man who buys a more affordable pair of $10 boots will only be able to wear them for a season or two before they fall apart. While the rich man initially makes a more expensive purchase, the poor man will buy more pairs of boots in his lifetime, eventually spending more than the rich man ever does.

It can be difficult to bite the bullet and pay more than you’re used to for higher quality items, but there’s good reason to believe the long-term utility of many purchases outweigh the initial cost. But let’s get something straight: this doesn’t mean you should shell out thousands on flashy brand name items; there’s a difference between luxury and quality, and high cost doesn’t automatically equal durability. The boots theory works best in practice when it’s applied to necessities and items that will be used for a long period of time, with no need for replacements.

Some examples of smart boots theory-based purchases are: stainless steel pots and pans for home chefs, a family computer with a large amount of memory and storage space, children's clothing that can be passed down, and (of course) work boots for people whose job involves high levels of physical labor.

Try a Spending Freeze

It’s one of the easiest tips on this list because most people do it all the time without realizing it: go a whole day without spending money.

The parameters of a spending freeze are up to each individual, and there's no need to make it just one day. Some people like to dedicate a week or two where they only spend a limited dollar amount — strictly on necessities — while others try to go a day or even a whole weekend without spending a single dollar. As you get into the habit of not spending any money at least one day a week, you might find there’s more and more money left over in your budget at the end of each month.

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