Saving money is important, but not an easy habit for everyone to master. Without a solid plan to systematically save, you are more likely to spend, and not have enough money in the bank to whether an emergency, buy a car, meet retirement, or take a vacation. This guide and embedded calculator will help you understand your savings, and help you make adjustments so you can better meet your short and long term savings goals.
Why You Need To Start Saving
Surely you’ve heard all this before. But there may be a small part of you that still wonders why it’s so important to keep your hands off some of your hard-earned money. After all, what good is it if you can’t spend it?
Here are some common reasons people suddenly need money in the bank.
- You lose your job. Layoffs happen. You may be lucky enough to find a new job quickly, but what if it doesn’t pay as well as your old one? What if you keep your job, but your hours are drastically cut?
- You have a medical crisis. Unpaid medical bills are the in the U.S.
- You have to move unexpectedly. You could be evicted, or maybe you need to move to be closer to a friend or family member in need. Maybe you get an unexpected job offer two states away. Whatever the reason, moving is expensive, especially when you have little time to plan.
- Your car breaks down. If you’re like most Americans, your car is a lifeline — it’s how you get to work, get to the grocery store, and maybe even get your kids to school. Unless you’re lucky enough to live in an area with excellent public transportation, you’ll need to pony up to fix or replace it as soon as possible.
- A close friend or family member needs help. Perhaps someone close to you needs help to face a medical problem or put a roof over their head. Or worse, someone close to you dies, and you need to pay dearly to help with funeral expenses, or travel to attend the funeral.
Even with health insurance coverage, co-pays and deductibles can add up faster than you can cover them.
Savings is not all about doom and gloom, however. Even if you’re fortunate to avoid the budget-busting scenarios above, a healthy savings account can help you earn a little extra money in interest. It can help you afford things that have an impact on your quality of life, like buying a house or going back to school. And yes, it can even help you afford some of those “wants” in life — a nicer car, a well-deserved vacation — that would otherwise be too far out of reach.
If we’ve finally convinced you that it’s important to have some personal savings, now you’ll need to decide where to put it — other than stuffing it under your mattress or inside a spare cookie jar.
Where should I put my savings?
As we’ve mentioned before on Money360, your personal savings should be in an account that has three main characteristics:
- Liquidity: Liquidity is just a fancy way of saying that your money needs to be readily accessible when you need it. For example, you don’t want to put all of your savings in a certificate of deposit where you’ll be penalized if you need to access it before the CD term is over.
- Low volatility: Stocks, real estate — the value of these things can vary tremendously from day to day, week to week, month to month. They aren’t the best for personal savings, because you need a “sure bet” that you won’t be losing money.
- Security: Keeping your money in a secure place is important — after all, that cash under your mattress could easily be stolen or lost in a house fire.
For all of these reasons, we think a traditional savings account is typically the best place to put your personal savings. You have ready access, the value won’t fluctuate, and you can be secure in the knowledge that your money is FDIC-insured against losses.
You have two main choices when it comes to your savings account: Your brick-and-mortar bank or credit union, or an online bank. Both are safe places for your money, but which one you choose comes down to personal preference:
- Choose a brick-and-mortar bank if… you want in-person service, and you don’t mind earning less in interest to get it. Traditional banks also offer a bigger range of services (more account types, loans, credit cards, and so on) so they can be a “one-stop shop” for your banking needs.
- Choose an online bank if… you want the highest interest rate and lowest fees, and don’t mind that you won’t be able to discuss your account with someone in person. You also may have to put up with quirks such as longer hold times or not being able to make cash deposits.
For a more complete discussion of online banking and our current recommendations, see The Best High-Interest Savings Accounts Online.
How does a savings account work?
A savings account is a bit different than your checking account, which is designed for frequent access. Your checking account is probably where your paycheck gets deposited, and it’s probably where you’re getting cash for day-to-day expenses like gas, bills, and food.
A savings account is a bit of a different animal:
- It earns interest. Few checking accounts actually let you earn interest on your money, since it’s fluctuating all the time. But with a savings account, the bank actually gets to use your cash to make loans to other customers. Interest is what the bank pays you in return. Just note that it won’t be much — even the best savings accounts only earn about 1% APY, or annual percentage yield.
- Transactions are limited. Federal rules prohibit you from making more than six certain types of withdrawals or transfers per statement period. That’s because they don’t want you treating a savings account like a checking account. Accordingly, you typically won’t have a debit card or checks that are connected to your savings account.
- Fees are lower. Banks can typically rest assured that you’re going to keep your money in a savings account for a lot longer than in a checking account, so they don’t have to charge as many fees.
The Other Piece of the Puzzle: Avoiding Debt
If you’re like many of us, you may have some debt payments that are weighing you down and making it harder for you to grow your personal savings. What should be your priority? Getting rid of the debt, or building up your savings?
Some experts contend that it makes little sense to pad your savings account at 1% APY when you may have credit-card bills or other debts at double-digit interest rates. However, others contend you should always have at least some personal savings for an emergency fund before you aggressively tackle your debt. That way, they reason, you can tap your savings and avoid using credit cards or accumulating even more debt in the event of an unexpected expense.
There’s no easy answer, but your first step is pretty simple: Do all you can to avoid adding any more unnecessary debt and giving yourself an even bigger headache.
Basic Savings Strategies
Wondering how to get started saving? Here are four general strategies that anyone can adapt into a personal plan.
Out of sight, out of mind.
It’s easy to save money when you never really have it to spend in the first place. Automatically deposit a portion of every paycheck into your savings account each pay period.
Do it before you pay bills or other expenses, no matter how essential, and get used to living within these slightly narrower means. Soon, you’ll barely notice the “missing” money — which is the whole point.
Track your money, and then set a budget.
Sounds simple enough, but it’s hard to save money if you’re not sure where you’re overspending. Keep a record of every dollar that comes in, and every dollar that goes out. If you want to keep things simple, use a pad and paper, but there are several great budgeting programs that can ease the process (we recommend several at the end of this article).
Once you have a good idea where your money is going, set a budget. One particularly effective method is called a zero-sum budget, where every dollar has a concrete job — whether that’s to pay necessary expenses or boost your savings. For a detailed look at the process, check out How and Why to Use a Zero-Sum Budget.
Set savings goals that are achievable.
We would all love to retire by 40 or be a millionaire within the next five years, but setting too lofty a goal may simply lead to discouragement. Remember — the bigger the goal, the longer it will take to achieve.
On the flip side, a short-term goal like saving for a down payment on a car might be doable relatively quickly.
One great way to find out how long — and how much — you’ll need? Crunch the numbers using our savings calculator in the next section.
Use different strategies for different goals.
For short-term goals such as padding your emergency fund, an easily accessible high-yield savings account probably makes the most sense. For an intermediate goal, such as a down payment on a house, a long-term certificate of deposit with a better interest rate might make more sense.
Long-term savings, including your all-important retirement fund, mean you can take a little more risk with your money in pursuit of bigger gains. Whether you use your employer’s 401(k), open an IRA, or invest in stocks and securities outside of a retirement account, this money will be harder to access and subject to the ups and downs of the market, so you shouldn’t plan on needing it for at least 10 years.
Using our Personal Savings Calculator
With Money360’s personal savings calculator, you can set a savings goal — no matter how modest or lofty — and adjust your timeline, contributions, and other factors to see whether it’s achievable.
To use our calculator, start by clicking on the number above “savings goal.” Type in your own goal, whether you want to save $5,000 for an emergency fund or $500,000 for retirement. After that, put in how many years you have to work toward your goal, the amount you expect to put away each month, and the expected rate of return you’ll get on your money. (Remember, in a typical savings account, this won’t be much — maybe 1.0% APY at best. In a retirement account, you might expect annual gains of 5% to 8%.) You can also adjust the expected inflation rate, or leave it at its 2% default if you’re unsure.
After crunching the numbers, we’ll tell you whether your goal is realistic. If so, you’ll also see whether you’re going to overshoot it, and by how much. On the flipside, if you’re going to fall short, we’ll tell you by how much. Scroll back up to play with your goal, timeframe, contribution, and expected return to form a better plan.
Simple Savings Tips for Everyone
Saving money doesn’t have to be painful. There are dozens of small tweaks you can make in just about every area of your life to keep a little more money in your pocket. You may be surprised at how much you can set aside with simple penny-pinching measures.
General Savings Strategies
Shop with a list: Whether you’re grocery shopping or heading to a big-box store, know what you need in advance to avoid making impulse buys.
Sell your stuff: Got furniture, clothes, or other items you don’t need? Turn them into cash via consignment, Craigslist, eBay, Facebook resale groups, or an old-fashioned yard sale.
Boost your credit score: When you have good credit, it will cost you less to borrow money, whether that’s via a credit card, car loan, or mortgage. You’ll pay less in interest every month, leaving more of your cash in the bank.
Haggle: Everything is negotiable — you just need to have the courage to ask for a lower price. That goes for the obvious (cars, real estate) and the not-so-obvious, too (furniture, health care costs, even your phone or cable bill).
Find a side hustle: Make a little extra money by turning a passion into a part-time gig. Love to stay fit? Teach a couple of aerobics classes. Passionate about art? Show your work at a local show to see whether you can attract buyers.
Saving Money on Entertainment
Cut cable: Try an on-demand service like Netflix, catch shows for free on networks’ websites, or try scaling back to what’s available over the air for free.
Use your library: Your tax dollars already pay for it, and if you have your eye on a title they don’t have, you can often request they purchase it or borrow it from another library in the same network.
Go to dollar cinemas: If you still want a theater experience but are willing to wait a few months to see a film, you can catch a movie for just a few bucks at a second-run theater. Try to resist the budget-busting snacks, though.
Scout out free and discount days at local attractions: Museums, zoos, and other venues often offer reduced or free admission certain days of the month.
Cancel your subscriptions: If you’re like most of us, you flip through a newspaper or magazine in minutes. Go online to search for similar content — depending on the publication, it may even be free.
Save on Health Costs
Don’t skip the doctor or dentist: Get your regular checkups to help catch health or dental problems before they snowball into something bigger requiring costly treatment. A routine cleaning costs far less than a root canal.
Always see if there’s a generic version of your prescription: Generics are substantially cheaper, especially if you’re paying out of pocket.
Take advantage of wellness programs: Many employers have some sort of wellness program where you can save on insurance or receive other incentives if you participate.
Skip the gym: You can use bodyweight exercises or inexpensive dumbbells for an effective at-home strength program. Need some cardio? It’s always free to go for a jog, and YouTube offers a number of free routines to get your heartrate up.
Drink tap water: Keeping your body hydrated also helps you avoid pricey, sugary drinks such as soda and juice. If you need water to go, fill up a reusuable Nalgene bottle.
Save Money on Food
Cook more: Takeout and convenience foods cost a pretty penny compared to a simple homecooked meal.
Plan meals according to sales: For instance, save hamburger night for when ground beef is cheap instead of buying it regardless of the price.
Buy generic brands: Often, store brands and name brands are nearly identical products — you just pay more for the name brand’s fancy marketing and packaging.
Don’t skip breakfast: Opt for some cereal or a scrambled egg, and eating breakfast can be quite cheap. It also keeps you from being tempted by pricier convenience foods the rest of the day.
Brown bag it: Eating out most days at work is an expensive habit. Every time you bring your own lunch, it’s like giving yourself a $10 raise.
Save Money on Clothes
Try a capsule wardrobe: A capsule wardrobe relies on a few timeless, well-chosen pieces that can be mixed and matched together to create an endless number of options. Add pizzazz with accessories.
Check out the thrift or consignment stores: With a little effort, you can find very gently used clothing that will last just as long as an item you purchased new.
Consider splurging on items that will see frequent wear: If you know you’ll spend all fall and winter in a pair of boots, paying a little more for a quality pair makes more sense than having to buy new ones halfway through the season.
Avoid dry-clean only garments: Dry cleaning is expensive, not to mention one more errand to deal with on evenings or weekends. Look for professional pieces that can be cleaned at home, perhaps using the delicate cycle and skipping the dryer in favor of air-drying.
Look for bargains out of season: You may not get first pick, but you can save some serious cash by snapping up a sweater in early spring or a bathing suit in the fall.
Save Money on Housing
Consider downsizing: Paying a bigger mortgage — and paying to heat, cool, and maintain extra square footage — doesn’t make sense unless you actually need the space.
Become a landlord: If you have an extra room or a basement apartment, consider bringing in a tenant who will pay rent and bring in money each and every month, or renting out the space on Airbnb.
Refinance your mortgage: If you bought your house when interest rates were higher, a refi can save you a substantial amount every month.
Investigate lower-cost areas: If you’re paying an arm and a leg to live in a pricey city, investigate nearby suburbs or exurbs that can save you a mint in rent. If the commute would become unmanageable, see whether you can save in another neighborhood.
Examine your property taxes: Sometimes the auditors get it wrong. If you think your home has been overassessed, county officials and ask how to challenge it.
Save Money on Transportation
Don’t skimp on routine maintenance: Avoid costly car problems with simple upkeep: Check tire pressure regularly, remember those oil changes, and follow your car manufacturer’s recommended maintenance schedule.
Carpool: Got a coworker who lives close by? Take turns driving each week. You’ll save on gas and your car also won’t see as much wear and tear.
Save on gas: Many grocery stores let you earn fuel points that make gas cheaper when you make day-to-day purchases. Take your savings beyond food: If you know you need to make a big purchase at a certain store, see whether you can buy a gift card at the grocery and earn fuel points, too.
Buy used: New cars lose their value so quickly that buying a well-maintained used car is almost always a smarter financial bet.
Cool your lead foot: Speeding and other aggressive driving habits rapidly cut down on your car’s fuel economy, forcing you to fill up more often.
Save on Utilities and Energy Costs
Use cold water to wash clothes: Modern-day washers clean clothing just as effectively using cold water. You’ll save energy (and money) by skipping the hot-water cycle.
Get a programmable thermostat: If you’re always forgetting to turn the heat down before you hit the sack, get a thermostat that can do it for you — and make things toasty again right before you wake.
Switch to LEDs: You’ll pay a bit more for LED lights upfront, but they outlast incandescent and CFL bulbs by so long, and use so much less energy, that you’ll save lots of money in the long run.
Don’t ignore your ceiling fans in the winter: Just switch them to rotate in the opposite direction (usually clockwise) to more evenly distribute heat throughout the room.
Draw the shades in the summer: All that sunlight heats up your room and forces your air conditioner to work even harder. If you’re leaving the room, draw the shades to keep things cooler.
Best Savings and Budgeting Software
It’s easier to save when you know exactly where your money is going. Fortunately, there are some great apps and programs that can help you keep track of every dollar. Here are some of the best.
is one of the most popular personal finance tools around. With more than 15 million users, it’s one of the top choices for any tech-savvy saver, whether you use it via its website or a smartphone app. Oh, and did we mention it’s free?
On Mint, you can analyze your spending patterns, set up a budget, set up custom alerts, pay bills, track your investments, and even track your net worth. Note that you will be recommended sponsored services, which is how Mint makes most of its money.
aims to fill in some of Mint’s shortcomings. For instance, it offers a running register, which Mint does not. And if you’re a Quicken or Mint user, you can import your data right into CountAbout, which you can access via its website or smartphone app.
With CountAbout, you can track your expenses and construct a budget and customize your spending and saving categories. The service isn’t free: For $9.99 a year, you get a basic account; for $29.99, a premium account adds automatic downloading of bank deposits and withdrawals, credit card transactions, and other information.
You Need A Budget
Called YNAB by its devoted fans, You Need a Budget is laser-focused on teaching its users better money management. You can focus on certain goals, including getting out of debt or saving for the future. There are even free webinars on a range of financial topics.
YNAB lets you schedule repeating transactions, generate spending reports, see your net worth, and more. Your information will sync automatically whether you’re accessing it on your smartphone, tablet, or computer. It isn’t cheap at $60, but it’s a one-time purchase.
As you graduate from beefing up your personal savings to thinking about long-term investments, can help you with both. And a nice bonus is that it’s free, though you’ll have to pay if you want personal investment advising (how much depends on your account balance). You can access Personal Capital via its website or app.
With Personal Capital, you can track your net worth, see whether you’re paying too much in investment fees, and improve your portfolio in hopes of getting a better return. But you can also do traditional budget- and savings-focused tasks, such as tracking cash flow and bills.