How To Save Money As A Habit
If you are like most people, then you may find it hard to save a significant amount of money. Saving money is so difficult that over 58% of Americans have less than $1,000 in savings. However, saving money has numerous benefits, particularly if you start saving money at a young age.
In fact, one of the most common regrets people have at an older age is not saving more money when they were younger. In this article, we will break down all of the benefits of saving money and explain how it can go a long way towards both preserving and building wealth. We will also talk about how you can turn the act of saving money into a lifelong habit.
How To Begin Saving
- Set Budgets and stick to them! Most people can make a budget, but very few can stick to it.
- Reduce your bills, find areas to cut frivolous spending
- Reduce your meal costs. Eating out at restaurants is one of the top reasons why American’s struggle saving money
- Reduce your housing expenses. Ideally, rent or your mortgage payment should not be over 35% of your gross income.
For those of you looking to begin saving money, there are a few basic ways to get started. One of the easiest ways to start saving money is the classic piggy bank approach. This is where you will set aside a few dollars per day in a jar, bank account (or even use piggy bank) and build up the balance over time. Eventually, you will have a chunk of change ready for your saving goal. Even $3 per day adds up to over $1,000 in one year!
Tip: Our favorite online savings account is Betterment Everyday!
Set Saving Goals
Having a saving goal is extremely important. You will want to have a goal and a time horizon for hitting that goal. You should be able to break down your time horizon into equal periods where you contribute to your savings. This way you have an idea of when you will hit your savings goal as well as how much capital you must contribute on a regular basis. For example, if you wanted to save $6,000 over the next year, you would want to hit the short term goal of $500 per month going into savings to stay on track.
One of the easiest apps to help you save and invest money in small amounts over time is Acorns. This app will round up your credit or debit card purchases to the next dollar and invest the spare change in an investment account. Say you buy a soda for $2.25, Acorns will round it to $3 and send $0.75 to your Acorns account to be invested. Check out our review of Acorns here.
Benefits of Saving Money
There are so many benefits of saving money that it is difficult to name them all. However, here are some of the best benefits of saving money.
- It helps you to deal with emergencies
If you have an unexpected emergency in your life and you do not have a source of immediate funds, you could find yourself in a world of trouble. Emergencies that are particularly challenging include natural disasters, illnesses, injuries, car accidents, robbery etc. If you have a rainy day fund in the bank, it is much easier to deal with these sudden events. This is why we always recommend having an emergency fund. This is typically 3 to 6 months of monthly non discretionary spending. Experts recommend keeping this emergency fund in a completely separate bank account. As far as online savings accounts go, our top pick is Betterment Everyday.
- It limits your debt
If you have a habit of taking on a lot of debt (through credit cards, auto loans, personal loans etc.) you should probably consider cultivating the habit of saving money. At first, most of your savings will go towards paying down your debt. Eventually, you will be able to invest your savings so it will grow over time. Most people are in debt because they are bad savers, since they do not have an emergency fund. Once you have this in place, you won’t need to reach for the credit card if there is an unexpected expense!
- It helps to provide peace of mind
People who live paycheck to paycheck have to live with an enormous amount of financial stress. If you can prevent living like this, then you should strongly consider it. Saving money is one of the best ways to prevent living paycheck to paycheck and to get some financial peace of mind.
- It helps you to prepare for retirement
It should go without saying, but your retirement will most likely be significantly more comfortable if you save for it. Roughly 48 % of Americans aged 55 and older have no 401k or IRA. These people will most likely experience a significant amount of financial struggle during retirement. The goal is to enter your retirement with enough money to live comfortably so that you don’t have to keep working when you are in your 70s, 80s and 90s.
- It is a cushion against sudden job loss
The last thing that you want to happen to you if you lose your job is to not be able to pay your rent or mortgage. At that point, it is just a matter of time until you are staying on your moms couch. Instead, it is far better to simply have savings that you can fall back onto during your time of financial hardship. This is another reason why we recommend saving an emergency fund. An emergency fund would cover you during a sudden job loss. Typically an emergency fund is 3 to 6 months of discretionary expenses. For most people, that is enough time to find a new job and get back on your feet.
Benefits of Saving Early
The earlier that you can start saving money, the better. If you can start saving money in your childhood or teens, then this is ideal. There are several reasons why starting young is highly beneficial when it comes to saving. The first reason is simply that if you are saving money from a younger age, you will be more likely to stash more money away over time as opposed to spending it or wasting it.
By far the most important benefit of starting saving early is the fact that compound interest has its greatest impact when there is a longer time horizon. This can potentially impact long term savings exponentially.
Another benefit of starting saving early is that it puts you in the habit of saving. Many people never get in this habit and they simply spend all of the money that they make, if not more. So, if you can get in the habit of saving early in your life, it will most likely serve you very well.
We already said that compound interest is a huge benefit to saving money early on, but what exactly is it? Here is a brief explanation.
Simple interest occurs when interest is accrued in a savings/checking/brokerage account. This type of interest is interest that is usually paid annually on the value of the account. The interest is paid as a percentage of the account’s value. So, for example, if you have a savings account with $1,000 in it, and if this account has a 5% annual interest rate, then the bank will pay you $50 in your first year in interest.
Compound interest occurs when you earn interest on your accrued interest. In our example, the next year you will receive 5 percent interest on $1,050, which is $52.5. You will then have $1,102.50 after the second year. So, as time goes on, interest payments tend to get bigger and bigger as long as you don’t draw down your account. Compound interest can help you build long term wealth over time.
The defining characteristic of compound interest is that it allows you to receive interest on both the principal and the interest you have already received. It is this characteristic that allows investors and savers to build passive wealth over time.
Other Good Financial Habits
In addition to saving money and investing for the long-term, there are a number of other good financial habits that you should consider building into your life.
Another good financial habit that you should consider cultivating is budgeting. Many people get into financial trouble simply because they have no idea how much they are spending or how much they are taking in. You should be completely aware of how much money you make each month, and how much you can afford to spend. Living paycheck to paycheck is not an ideal financial situation. Building a budget and sticking to it is absolutely crucial to build wealth over time.
One of the most detrimental financial habits is excessive spending, especially on depreciating assets. Excessive spending can get people into a lot of trouble financially. One mistake that many people make is buying cars that they can’t afford. Cars can be extremely problematic financially because many times they are depreciating assets. This means that their value drops over time. In fact, the second that you drive your brand new car off of the lot, it loses a significant amount of value.
Finally, another good financial habit to think about cultivating is avoiding excessive debt. Few things can slow you down financially as fast as having too much debt. Student loans, car loans, credit card debt, etc. can follow you around for years if not decades, wreaking havoc on your peace of mind and your financial well-being. If you can, you should definitely consider trying to avoid accumulating too much debt.
Saving, budgeting, and investing for the long term are characteristics of a financially savvy individual. If you can add a few of these financial habits to your daily life then you could be setting yourself up for a bright financial future.