Learning how to provide for yourself financially now, while paying off the debts of yesterday, and saving for the future… can get confusing. Should you save first, or pay off debt first? What about your bills? And shouldn’t you be saving for retirement too?
What is the best way to save money, anyway? Should you keep it all in a savings account, or are there better options?
Phew. Let’s take it one piece at a time. If you’re new to budgeting, getting control over your expenses is the first step to saving. Why? Because saving is great, but if you’re spending faster than you can save, you’re not going to get anywhere fast.
Same goes for debt: If you’re paying interest on student loans or credit card debt, that’s money that could be going into your pocket! The faster you can pay off your debt (and stop paying those interest payments), the sooner you can start growing your long-term wealth.
From there, it’s a matter of creating smart systems that help you save, and choosing the right types of accounts to help you achieve your financial goals.
Learning how to save money is an important skill; it’s something you’ll probably be doing for most of your life! Here are savings tips to help you set yourself up for success.
Gain control over your expenses.
You may have heard this before: The best way to save more money is to earn more money. But in reality, that’s not always the case. People tend to increase their spending as their income increases, meaning that making more doesn’t always mean you’ll be saving more. (In fact, a survey from MagnifyMoney found that 28% of Americans earning $100,000 reported living paycheck-to-paycheck.)
In the big picture, when it comes to your money saving methods, the most important thing to focus on is increasing your financial margin: Spending less than you’re earning. This concept is better known as living within your means, and it starts with gaining control over your expenses.
Most people start their financial lives the same way: You get paid, use that money to pay for your expenses, and then you plan to save whatever is leftover, if anything. If you don’t get paid, you get behind on your bills.
It’s a difficult cycle to break, because unless you earn more money (or experience a windfall), there isn’t really a way to get ‘ahead’ of your finances. This is known as living paycheck-to-paycheck–and it’s the reality for 53% of Americans.
The problem with this system is that there is nothing (aside from sheer willpower) stopping you from spending the money that you plan to save. There’s also nothing protecting you from going into debt (like an emergency fund, hint hint). In the same survey from MagnifyMoney, 70% of respondents said that even one missed paycheck would cause bills to pile up.
Money Tip: Keep track of your expenses with Expenses.
Keeping track of your expenses in your spending categories can help you reign in your spending and stick to your budget. It can also help you start to see opportunities for where you might be able to save extra cash each month, even if it’s just a few bucks on your car insurance or electric bill. Over time, those small savings add up to enough cash flow to help you break the paycheck-to-paycheck cycle.
When you know how much you actually need to live each month, you can start to set that money aside, and then tell the rest of your money where to go–whether that’s to your emergency fund, other savings goals, or debt repayment–instead of wondering where it went.
With Simple Expenses, you can automate much of this process: Just enter your monthly bills and living expenses, and we’ll automatically set aside the money you need. You can even set up a Funding Schedule to fund your Expenses automatically as soon as you get paid.
Get organized about your debt.
Do you have debt in the form of student loans, credit card debt, or a mortgage or car loan? You don’t have to choose between saving money and paying off debt–you might be able to do both at once!–but you will need to have a plan in order to get it done.
Most financial experts will tell you to prioritize paying off your highest-interest debt ASAP. That’s because if you’re paying a high interest rate on your credit card balance (can be 19%+), it doesn’t make sense to stash your money into a high-yield savings account just to earn a lower rate: You’ll pay more in interest on your debt than you’ll be able to earn on your savings balance. You’re better off paying your highest interest debt first, while making minimum monthly payments on your other debts.
Money Tip: Use Expenses to pay off your debt faster!
If you want to start saving money, you’ll want to get organized about your debt. Figure out how much you owe (your total balance), the interest rate you’re paying on each debt, and how much your minimum monthly payment is for each of them.
Then, create Expenses for each of them! When you’re creating the Expense, we’ll ask you to select a date that you need it by. Try to pay off any high-interest debt (like credit card debt) as aggressively as you can by increasing your monthly payment amount or moving your end date up a few months!
Check out this blog to learn more about saving money and paying off debt.
Get clear about your savings goals.
When you make a budget-friendly decision, like renting audiobooks from your local library instead of buying them, do you have a specific motivation behind your frugal ways? In other words, are your savings goals clearly defined? Do you know why you’re saving money–or are you just saving because you know you should be?
Although saving for the sake of saving is a perfectly responsible thing to do, setting goals for your saving early in your financial life will help grow your money faster. It will also help you get into the habit of saving money.
Here are a few different types of savings goals you’ll likely have:
- Save for rainy days: You’ll want to have a few months’ worth of living expenses in an emergency fund.
- Save for short- and long-term financial goals, like adopting a dog or putting a down payment on a house: You’ll want a simple way to save up money, that’s safe from everyday spending.
- Save for retirement: Because the sooner you start saving, the better off you’ll be down the road.
All of these savings goals are important, but building up an emergency fund should be at the top of your list.
Here’s why: If you don’t set aside money for a rainy day, you’ll probably have to dip into your savings to cover unplanned expenses. If the expense is big enough, you might even have to start from scratch.
According to data from the Federal Reserve Bank of New York, while nearly half of households grew their savings, 30% of households depleted their savings accounts at least once over the past five years. Respondents were allowed to choose more than one cause, and: - 64% said they depleted their accounts to pay bills - 57% said they did it to pay for general living expenses - 27% cited reduced health - 16% said involuntary job loss was a factor
In other words: They got hit by a few rainy days.
Depleting your savings is emotionally and financially stressful. It’s not only bad for morale, but it also affects your ability to grow your money in the long-term, through the power of compounding interest, which you can read about here.
Find the right account(s) for the job.
Finally, the best way to save money is to choose the right account(s) for your needs. There are four main factors that you’ll want to consider when comparing your options for where to save your money:
- Interest rate: How much can you earn on your money?
- Ease of access: What do you have to do to use the money in that account (in case you need it)?
- Speed of access: How quickly can you withdraw your money, if needed?
- Fees/limits: Are there any limits on frequently you can withdraw from the account? Are there any fees for keeping your money in the account? Are there penalties for withdrawing from the account?
Here’s an overview of the most common account types used for saving.
|Checking account||High-yield checking account with Simple||Traditional savings account||High-yield savings account||CDs|
|interest rate||Very low||High||Low||High||Very high|
|How to use the funds (ease of access)||Debit card, digital payments, checks||Instant transfer to checking account||Transfer to checking account||Transfer to checking account||Transfer to checking account|
|How soon do you have access?||Instant||Instant, no limits or fees||3-5+ business days||3-5+ business days||3-5+ business days|
|Are there any limits or fees for withdrawing your money?||Typically no||No||Limit to X per month, fees for additional withdrawals||Limit to X per month, fees for additional withdrawals||Penalties for early withdrawal|
As you see, there are trade-offs to consider with each type of account–so you’ll want to think about your goal for your savings before making your decision.
It’s totally normal to keep your money in a few separate accounts. In fact, it can be helpful to protect your long-term savings from your short-term financial ebbs and flows.
Where to Stash Your Emergency Fund
For your emergency fund, you’ll want to have easy access to your money, and no limits or fees for withdrawing it. Starting an Emergency Fund in your Protected Goals Account with Simple is a great choice for your emergency fund.
Where to Stash Your Short- and Long-Term Savings Goals
For short- and long-term savings, you have several options. A Protected Goals Account with Simple can help you stay focused on each of your savings goals: Once you open a Protected Goals Account, you can set up Savings Goals for whatever you want or need in life.
Savings Goals make it easy to save for the things you want or want to do. There’s no need for spreadsheets or extra apps to budget and track your money. It’s right there inside your Simple app, growing bit-by-bit until you’re ready to spend.
Money Tip: Turn on Round-up Rules to save even faster.
Whenever you make a purchase, Simple will round up what you spend to the next whole dollar amount. When the “change” from those transactions reaches or exceeds $5, Simple transfers it to your Protected Goals Account — so easy you won’t even feel it. It’s like a digital change jar… one that adds up to real money in the bank.
If you’re already a Simple customer, click here to start stacking right now with Goals. You can adjust the end date to save more or less per day—whatever’s right for you. In a few months, you’ll wake up with an extra $1,000 that you didn’t even have to think about saving. That’ll be a good day. Happy stacking!
Disclaimer: Hey! Welcome to our disclaimer. Here’s what you need to know to safely consume this blog post: Any outbound links in this post will take you away from Simple.com, to external sites in the wilds of the internet; neither Simple nor our partner banks, The Bancorp Bank and BBVA Compass, endorse any linked-to websites; and we didn’t pay/barter with/bribe anyone to appear in this post. And as much as we wish we could control the cost of things, any prices in this article are just estimates. Actual prices are up to retailers, manufacturers, and other people who’ve been granted magical powers over digits and dollar signs.