2020 was a rocky year for many, particularly when it comes to finances. In the past year, unemployment rates increased, many people took pay cuts, and others found themselves with high medical bills. And if you were a business owner in 2020, it’s likely the pandemic took money out of your pocket or even forced you to shut your doors.
With all of the financial uncertainty, the last year has brought, many of us are looking for new ways to save money, so we can be prepared for the new year. If you’re looking for more ways to save money and cut expenses, these tips can help.
Why saving money is so important
Saving money is crucial for a few different reasons. For starters, an emergency fund can help you if you experience a sudden job loss, pay cut, or unexpected large financial expense. Building a savings account can also help you save for long- and short-term financial goals, pay off debt, and fund your retirement.
A 2017 MarketWatch report found that 19% of Americans have no savings set aside in case of an emergency and 31% of Americans have less than $500 saved. That means 50% of Americans are living paycheck to paycheck.
On top of this, 2020 saw over 22 million jobs lost, and since then only 10 million have been recovered. Without enough savings to pull them through, the number of Americans living paycheck to paycheck skyrocketed to 63%. This means the majority of Americans had no savings and couldn’t pay for an emergency (without missing bill payments) in 2021.
How to realistically save money in 2021
So, how can Americans start saving money when many are facing income insecurity? There’s no easy answer to this question. If you’re struggling to get by and make bill payments, I highly recommend continuing to pay your expenses on time and aiming to build a savings account as soon as you begin earning more or reducing your expenses.
Saving money requires setting a goal and then building up the habit of saving. Even if you’re only able to save a few dollars a week, practicing this habit can set you up for long-term financial success.
1. Reduce your expenses
Before getting started, it’s important to know how much you’re spending on expenses every month. Your expenses include:
- Utility bills
- Cell phone and internet bills
- Debt payments
- Subscriptions and memberships
- Discretionary purchases (anything non-essential you purchase)
Any money that leaves your bank account that doesn’t move over to a savings account can be considered an expense. Once you’ve listed out all of your expenses and how much they’re costing you a month, you can start finding ways to cut away at this number by analyzing your spending habits.
2. Rethink your living situation
One of the best ways to significantly decrease your expenses is by moving to a more affordable home. If you’re struggling to make ends meet as a renter, you might consider finding a smaller place or a residence in a more affordable area. You can also consider moving in with family or getting a roommate while you begin rebuilding your finances.
Homeowners might also decide to refinance
to help save hundreds a month on mortgage payments. Rates are currently low, which means you might be able to get the break you need on your home loan.
3. Review memberships and subscriptions
Next, I recommend looking at any recurring memberships or subscriptions you might have signed up for and forgotten about. It’s easy to sign up for a product or service you intend to use for a month and forget to cancel when the next month’s bill comes around. Make sure you cancel any unused subscriptions right away. This includes streaming services like Netflix and Hulu.
I also suggest spending some time thinking about whether your memberships are serving you well. A Costco membership might save one person hundreds of dollars a year, but if you haven’t been to Costco in the past six months, is it worth it to you? Likewise, a gym membership might be rewarding to one person, and a wasted expense to another. Be honest with yourself about which subscriptions and memberships are improving your life and which are just draining your funds.
4. Lower, negotiate, and eliminate expenses
Did you know that most Americans overpay on insurance by an average of $330 a year? It’s easy to pay for bills like car insurance, cell phones, internet, and cable, without ever considering if you could be paying less.
Many times companies offer introductory offers and slowly hike up your rates and premiums over the years, until one day, you realize you’re paying hundreds of dollars more a year than expected.
Get quotes for switching providers online and try to negotiate with your existing providers. This can actually work. I currently pay under $30 a month for my cell phone with unlimited data from a major nationwide provider, simply because I’ve been a customer for 17 years and told them I was going to switch.
You may need a bit of patience while you deal with being shuffled around between call reps or wait for online chat respondents to answer your questions, but it can pay off in the end.
Lastly, consider if there are any expenses you’re overpaying on without realizing it. Many times when you buy electronics, warranties are issued. Be sure to find out if a product is within warranty before replacing it or paying for a replacement part. You can also do your part to reduce utility bills by switching to energy-efficient lighting.
See if you can find your own creative ways to lower your expenses.
5. Set a monthly budget
Now that you’ve hopefully reduced your expenses, I highly recommend budgeting
for the month. You don’t have to get too fancy here unless you want to. If you want to keep it basic, you’ll need to know how much money is coming in each month, how much is going out, and how much is leftover. I recommend removing any nonessential purchases from your “money going out” bucket, so you can analyze whether or not they’re needed. Only add them in if you decide they add value to your life.
You can even add spending categories to see where you might be overspending and set individual spending goals for each category. I recommend using a free tool like Mint to analyze your budget.
From here, decide how much of this money can comfortably go into savings each paycheck. To make it even easier, set up an automatic savings transfer to move this money from your checking account to your savings account each time your direct deposit comes in. You can even look into using apps (consider Qoins or Digit) or find bank accounts that allow you to round up your spare change (consider Bank of America’s Keep the Change account) to automate your savings.
6. Identify your spending triggers
Now that you’ve set a budget, make avoiding your spending triggers easier on yourself by coming up with a plan to prevent impulse buys. For instance, if you find you’re overspending on food (both groceries and ordering out), you might want to consider preparing your meals for the week. Not only will this allow you to make healthier food choices, but it can also reduce your grocery store bill by encouraging you to only buy foods that fit into your meal plans.
Meal prepping can prevent you from impulse food purchases that might occur when you’re over-hungry and looking for a fast meal. It can also make the occasional takeout order or restaurant visit feel more special. I would even go so far as deleting UberEats, DoorDash, and GrubHub from your phone, so you’ll resist the temptation from splurging on food.
If online shopping is your weakness, make sure you delete any stored credit or debit card information from the internet. You can even ask your parents or a trusted friend to hold onto your credit cards until you feel you can hold yourself accountable. If you overspend because you buy brand-name products, consider finding low-cost alternatives.
Whatever your spending trigger is, come up with a plan to stay successful on your new budget.
7. Try a savings challenge
Some of us get really excited by savings, while others just see it as money coming out of their pocket. Learning to love saving money requires practice, but you can ease into it by completing a savings challenge
. These challenges are designed to make savings a bit more fun while encouraging the savings habit.
8. Get a side hustle or search for a new job
A 2018 Gallup study found that 40% of Americans feel they are underpaid for the jobs they do. On top of this, the 2018 census found that one in eight Americans live below the poverty line. While it’s not possible for everyone to find a new job or side hustle to begin saving money, if you’re able to look for additional work to increase your income, it could be worthwhile.
If you can’t meet your current savings goals or you’re worried about possibly losing your job, adding a side hustle can help you grow your savings account.
Make your savings go further
Hopefully, you were able to find a way to reduce some of your expenses, so you can begin adding money to savings accounts. If you’re still not sure you’re in a financial position to save money, I still would advise you to review this information, so you can plan for the future.
9. Create an emergency fund
This can be controversial, but I never recommend saving for anything else (including retirement) until you have an emergency fund
in place. An emergency fund is critical and I encourage everyone to set a financial goal to at least start building one this year.
Your emergency fund will come in handy when your car suddenly needs new tires or that expensive part you’ve been putting off for years. It will be there to help you if unexpected medical expenses pop up. It’s most important for helping you stay afloat financially if you lose your job or receive a pay cut.
Most experts recommend saving up to six months worth of expenses in your emergency fund. So, if you spend $2,500 a month in expenses, you would need to save $15,000. This number can feel high and unobtainable for new savers, so I recommend starting with a goal of three months. Working towards saving $7,500 feels much more approachable than a figure over $10k.
Once you hit your three-month goal, you can begin working for up to six months. And don’t be discouraged if an emergency pops up and you have to take out a significant portion of your savings — that’s what this money is there for. You’ll be able to build it back up again.
Be sure to keep your emergency fund in a savings account
so you can access funds when you need them. I also recommend a high-yield savings account like Ally or Synchrony so you’ll accrue more interest over time.
10. Continuously save for retirement
Once you have an emergency fund in place, you can begin saving for retirement, if you aren’t already. If you already have a 401k or traditional IRA
from your workplace, review how much you’re putting into these accounts. If you don’t have a retirement account or your employer doesn’t offer one, you can open a Roth IRA, CD, or other retirement savings plan on your own.
Saving 10% of your paycheck
(20% is even better) is a good starting number to build your retirement funds. Yes, it’s true that the more you save for retirement when you’re younger, the better, however, this philosophy isn’t realistic for most. Young professionals are often underpaid and dealing with student loans or credit card debt, so contribute as much as you possibly can and increase the amount as your income increases.
11. Pay off existing debt
Next, I suggest paying down any debt you have. You should have the minimum payments for all of your debt built into your monthly expenses, so this approach will focus on further paying down credit cards, student loans, and other debt.
There are a few different approaches you can take to tackling your debt. You could start by paying off the largest debt first or concentrate on the accounts with the highest interest rates. You could also simply boost your payment on each account to help pay them off more quickly, at a steady rate.
Lastly, you could try the snowball method
, which tells you to pay off the smallest debt first, then apply that payment to the next smallest, and so on. This method allows you to achieve victories much faster, which can be extremely motivating — even though you might be paying more in interest for your higher balances.
Once your credit card balances are paid off or low, you’ll want to use them (within reason) to continue improving your credit score. Cash back and rewards cards on everyday purchases you already make can put more money in your pocket without costing you extra. Just make sure you only use them when you can pay them off in full or if you have a solid plan to pay them off quickly.
12. Create an HSA account
If you don’t have insurance or simply tend to have a high number of medical bills throughout the year, regularly contributing to a health savings account (HSA). This is an excellent way to plan for medical expenses and not have to worry if your medical bills are higher than average.
Most workplaces with high deductible insurance plans will offer some form of an HSA you can contribute to. Talk to your human resources (HR) rep to find out how to get started. If your employer does not offer an HSA plan or if you purchase insurance through the marketplace, you can still contribute to an HSA if you have a high deductible health plan (HDHP).
Not sure if your plan is considered an HDHP? The IRS has defined HDHPs as plans with deductibles at or over $1,400 (for individuals) and $2,800 (for families). If your plan qualifies and you decide to open a health savings account, you can contribute up to $3,600 (for individuals) and $7,200 (for families) for your HSA per year.
13. Start investing
Another smart savings goal to consider is investing. When it comes to investing, you can be as hands-on or hands-off as you’d like. If you want to invest in stocks actively, make sure you do your research and check in on the market frequently so you can make fast decisions. If you want to invest your money more passively, an index fund (particularly one that follows the S&P 500) can be a smart move.
If stocks aren’t your thing, investing in real estate can be another avenue for growing your money. You can actively invest and buy properties and rent them or flip and resell them. Or, you could invest more passively in REITs (real estate investment funds)
14. Create short- and long-term goals
Finally, be sure to set small and large savings goals within your savings accounts or high-yield savings accounts
. Short-term goals might include saving for a vacation, a new laptop or smartphone, or even a night out at an expensive restaurant. Long-term goals could include saving for a wedding, a down payment for a house, or a startup.
The bottom line
Building savings is fundamental to maintaining financial wellness. The good news is, there’s no wrong way to get started, and saving spare change or even $100 a month can empower you with more options if an emergency strikes. Be sure to take a hard look at your expenses and decide what can be cut so you can begin making healthy personal finance decisions.