Money doesn’t come easy, and unfortunately, neither does understanding it. Whether it’s a past-due bill or a mountain of student-loan debt, most of us have to contend with financial issues on a daily basis and our savings rates are looking pretty dismal. At the end of last year, the personal savings rate in America dropped to just 2.4 percent, its lowest level in more than a decade. With economic issues like wage stagnation and a shaky stock market, people might be less inclined to save, but saving is still important.
There are plenty of methods, strategies, and rules of thumb to help you reach your money goals. That said, all of the options might be overwhelming — perhaps you don’t even know where to start. Don’t worry, we have you covered. Below are five of the simplest but most effective strategies for how to save money, according to the experts.
1. Track your spending
First things first. If you want to save more money and spend less of it, you have to know where that money is going in the first place. Online budgeting tools like Mint, You Need a Budget, or Personal Capital make it easy to track your spending.
“Having that kind of visual snapshot of where you stand financially can serve as a powerful in-the-moment gut check when asking yourself questions like, ‘Can I afford it?’ or ‘Is this purchase going to bring me closer to or push me further from my goals?’” says personal-finance expert Stefanie O’Connell.
When you see all your purchases in one place, it’s much easier to take stock of where you stand financially. You can also see exactly how your past decisions have brought you to where you are today, O’Connell adds. For example, you probably have a feeling you dine out too much, but when you see just how much you’re spending on restaurants every month, that number can be a motivating eye-opener. “We can also use it as a measure going forward,” O’Connell says, “to track our progress as we start implementing good financial habits, like increasing savings and paying down debt.”
2. Pay off debt with the snowball method
If your goal is to finally get out of debt this year, you’re already on the right track — when you pay off your debt, you free up your money for financial goals. There are two basic strategies for kicking debt: pay off your highest-interest-rate debts first, or pay off your smaller balances first. While the former makes more sense mathematically, study after study shows that prioritizing your smallest balances, also known as the “snowball method,” is the most effective.
The snowball method was popularized by financial guru Dave Ramsey. List your debts according to balance, then tackle the smallest balance first while you make minimum payments on all other debts. Once your smallest balance debt is paid off, use the money you were throwing at that debt to to pay off the next smallest debt, while making minimum payments on the others, and so on and so on until you finally reach debt freedom. The idea is, when you’ve paid off a debt, you feel motivated and powerful, which gives you the momentum to keep going. And according to the data, like this studypublished in the Journal of Consumer Research, it works. People are more likely to stick with their debt payoff goals when using the snowball method.
There’s a caveat, though. One researcher said that the method works best “to the extent that a consumer’s debt accounts have similar interest rates.” Let’s say one of your debts has a slightly higher balance than another, but a massively higher interest rate. In that case, it makes more sense to focus on the higher-interest-rate debt instead. Be logical about how you approach your debt, but remember: Personal finance is psychological, and quick financial wins can be a powerful tool.
3. Pay yourself first
“PYF. Pay yourself first,” suggests Samuel Rad, a certified financial planner and instructor at UCLA. “This is the idea of always cutting out a part of your paycheck and putting it aside before you spend money on other things.” It’s an easy to implement, because you can automate it. Set up a recurring transfer from your checking to your savings account every payday. Even if it’s just $20 a paycheck, chances are, you won’t miss that money but you will be pleasantly surprised at your savings over time. “The PYF method also ensures that you don’t end up with ‘more month left at the end of the money,’” Rad says.
We’ve all been there: You get paid, go eat sushi, buy that new top you want, and go to the movies, only to realize you might not be able to pay your car-insurance bill this month. When you pay yourself first, you don’t have this problem. Most bill providers have automatic bill pay, and you can often designate a day each month you want that bill paid. Your car-insurance bill is already paid, so your discretionary funds are limited. In general, the idea is to make sure your spending priorities are taken care of before you have a chance to spend that money on less important stuff (no offense to sushi).
4. Aim for a 10 percent savings rate
If you’re not sure how much you should be saving every month, aim for the 10 percent rule of thumb. “If you regularly save 10 percent of your income, no matter how much you earn, you will always have the confidence of knowing you are living within your means,” suggests Carla Dearing, CEO of Sum180, a financial wellness service.
It’s a ballpark number, so don’t feel bad if you don’t quite meet that goal. Just aim for 10 percent. And if you find that you want to save even more, you can always adjust this percentage later. As Dearing points out, it’s best to combine this rule with the Pay Yourself First method. “If this seems too difficult, set up automatic bank transfers for the beginning of every month. By doing this, money you have earmarked to save is transferred from your checking to your savings account before you have a chance to spend it on something else,” she says. “Think of saving 10 percent as the way you empower yourself to make ongoing investments in your financial health, year after year.”
5. Try a no-spend month
Money challenges are fun because they turn good financial habits into a game. “Jump-start your savings campaign with a no-spend month,” suggests Dearing. “It’s simple: Commit to a 30-day period of spending ONLY on necessities. Walk or bike to everywhere instead of driving, take lunch to work every day, embrace free entertainment options, like exploring local parks.” And if you trip up, don’t get discouraged. The target is zero, but the overall idea is to simply spend less and save some extra cash.
The exercise can also help you rethink many of your expenses and possibly spend more mindfully in the future. “Not only will you save a lot of money during this one-month period, you may find yourself reevaluating old spending habits altogether and deciding you prefer your own creative, low-cost alternatives,” Dearing says. “This exercise can make a big difference in your personal balance sheet.”