Don’t Know How to Start Saving?  Start Here!

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Saving money is always a good idea.  One of the best ways to begin is by determining your savings goal.  Maybe it is for an emergency cash cushion, or perhaps you need to save up for a down payment on a house.  Whatever the goal is, it’s easy to feel worried or stressed about where you should be saving the money.  And how much should you should save?

As for where to save it, it depends on the goal.  If the goal is to plan for an event within a five-year time span (building an emergency fund, saving for a car, saving aggressively for a house down payment, etc.), use a bank account.  Preferably, this will be an account that earns interest and has no fees.  If you belong to or are eligible for a credit union, those institutions are usually your best bet for better interest rates on your savings.  Investing in stocks or bonds is too risky for a shorter time horizon.

If you have a longer-term goal, such as saving for your child’s college education (if that is more than five years from now) or saving for retirement, you should be investing, not saving.  I will delve into investing with other posts.  Right now,  let’s focus on getting the ball rolling on your shorter-term savings.

Determining how much to save is more of a challenge.  You can use the simple approach or the more thorough approach.  The simple approach is to guess.  Yes, guess.  How much do you think you can reasonably save each month (or week)?  You know your spending better than anyone else.  Most people guess on the high side.  Enthusiasm to start saving is admirable, but overestimating is very easy to do when you are in a state of wild enthusiasm to finally! start! saving!  So, make a decent guess, and then divide it in half.  Start with that amount.

The thorough approach requires reviewing your budget carefully to determine how much you can carve out to save each month (or week).  If you don’t have a budget, then now’s the time to create one and determine your targeted savings goal.  Here again, I suggest reducing the amount you think you can save to an attainable, reachable level to start.

After you’ve established how much you want to put aside into savings, you’re ready to go.  After a few months (or weeks), gauge how well this amount worked.  Did you struggle to pay your bills with this amount of saving?  Or did you hardly miss it?  If you struggled, reduce the amount for a few months.  If you barely missed that money in your budget, then go ahead and crank up the amount you are saving.  Repeat this process pretty much indefinitely:  Every time you evaluate that you are easily saving a certain amount, raise it.  Wait a few months each time, though, to account for unexpected expenses that might derail your saving plan.

The beauty of this approach is two-fold.  First, by doing a slow upward ratchet of the amount you are saving, you are building discipline and success into the project.  If you start with too high an amount, you are likely to give up very quickly and conclude that you aren’t cut out for this saving stuff.  Build your saving chops by starting small and building the amount slowly.  I promise you will be pleased with your progress!

The second reason this approach is effective is that the saving discipline can be transferred to a different financial planning goal as soon as the first goal is reached.  And once you have your short-term goals fully funded, you can transition right into investing for retirement or some other longer-term goal.

Finally, if you are just killing it on this savings thing, automate it!  Nothing is simpler than having technology do the work of saving for you.

What are your tips and techniques for saving money?  Do you find it difficult?  Share your thoughts below!


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