“I just don’t have enough money to save some each month.”
If I had a dollar for every time someone lamented how he or she couldn’t possibly save money, then I would never need to save money out of my own paycheck.
Unfortunately, this all-too-common complaint means the complainer has neglected the most important piece of personal finance advice: paying yourself first.
Saving shouldn’t be an afterthought once bills have been paid, groceries are in the fridge and rent is covered.
Step #1: Run the numbers
In order to pay yourself first, you need to do the often-dreaded task of budgeting. Tweet this
This doesn’t mean you need to have detailed spreadsheets and annotated notes of each purchase you make – but it helps.
Instead, write down all your major expenses in a month: rent, food, cell phone bill, utilities, transportation costs, loan payments etc.
Throw in a 10 percent buffer to be safe. Then subtract this number from your monthly income.
For example: Leslie earns $2,500 a month (after taxes and her 401(k) contribution).
Leslie’s bills and living expenses cost her $1,550 a month. She adds an extra $250 buffer to her expenses, just in case. Leslie subtracts her living expenses and bills from her monthly income: $2,500 – $1,800 = $700.
Step #2: Set an amount to save each month
Continuing to use Leslie as an example, she has $700 remaining after paying all her bills and transportation costs and buying groceries.
Leslie decides to give herself $100 a week to spend on shopping, entertainment or odds-and-ends she may need to buy. This leaves her with $300 per month in “wiggle room.”
Instead of leaving this money in her bank account, Leslie makes a plan to automatically move $300 a month into savings as soon as she gets paid.
Leslie gets paid twice a month, so she will need to contribute $150 of each paycheck into a savings account.
Step #3: Set up a savings account with a decent interest rate
Checking accounts are not the appropriate place to be saving money. Why? Because the interest rates on most checking accounts will earn you a penny a year.
Even the savings accounts at many traditional banks are quite lackluster. Instead of settling for a 0.01% interest rate, be sure to search around for the savings accounts with the highest interest rates.
Internet-only banks like Ally, Barclays, GE Capital Bank and Synchrony Bank Optimizer+ offer rates of 0.90%and higher.
This might sound insignificant, but on $4,000 in savings, it’s the difference between 40 cents in interest and $38 a year.
Step #4: Automate savings
If you can’t trust yourself to pay yourself first, then it’s best to automate savings. Tweet this
This way, the money coming into your account will just be the money for bill paying and spending. You won’t have to worry about the temptation to spend money you should be saving.
Paychecks paid through direct deposit can easily be split to send a percentage into a savings account.
Speak to your employer about deferring a set amount from each paycheck into a savings account.
Or you can automate the transaction from your bank. Just be sure you don’t accidentally end up in an overdraft situation because it automates to save money that isn’t in your account yet.
Step #5: Adjust how much you save
Not everyone can be like Leslie and save $300 each month. In fact, you may run your numbers and realize you can only afford to save $2 out of each paycheck.
Don’t be discouraged.
The important part of paying yourself first is to actually take action. Tweet this
It is much easier to build the habit of saving early instead of getting into the habit of spending all your money and trying to recalibrate later in life.
If all you can afford for the first year is $2 a month, then still diligently save those $2 a month.
Many online savings accounts don’t have a minimum requirement for setting up an account, so you can feasibly save $2 a month without non-sufficient funds penalties.
As your income increases (or debt decreases), then adjust how much you defer into savings.
Aim to save at least 15%.
Ultimately, everyone should aim to save about 15% of their paycheck after their contributions to a retirement fund.
This money can be used to build up both an emergency fund and to save for large purchases down the road.
The journey to becoming a saver may be difficult at first, but the experience of an unexpected expense without any savings will be even more painful.