Save Your Money

What are the best habits to create and sustain healthy saving behaviors? I’ve seen various strategies that range from stellar, to creative, to works in progress. From these experiences, here’s my list of the most effective ways to consistently and successfully save money:

1. Pay yourself first.

The best way is to do it before you spend it. Payroll deductions are most effective as they’re effortless and invisible. When you divert money from your paycheck to your savings, you are paying yourself first. The money never finds its way into your checking account; you don’t see it and you don’t spend it.

2. Set a target and track your spending.

Know your overall spending each month. You don’t need to track every penny every day but you should know the total and whether you’re roughly hitting your spending target. If it helps, use an app like

3. Re-assess variable expenses.

Most expenses are variable and you should regularly re-consider them. Some — e.g., gym memberships, Netflix, and Spotify — are short-term and easy to unplug. Others are longer-term commitments — e.g., an apartment lease or a car loan — but also treat them as variable expenses and force yourself to re-commit to those decisions.

4. Distinguish between discretionary (“wants”) and mandatory (“needs”) spending.

If it is discretionary, think twice. If you’re not sure, assume it is discretionary and hit the “pause button” until you have your spending where you want it to be.

5. Don’t let your expenses grow proportionally with your income.

As your income grows over your lifetime, don’t allow your expenses grow proportionally. This is a hedonic treadmill that will be hard to get off. You’ll have more stuff but you won’t be happier.

Instead, create a discipline that as your income grows, you save more. One way is to increase your 401K contribution rate whenever you get a raise.

6. Use mental accounting buckets.

Remember the Christmas Clubs and lay-away plans of a bygone era? These were great examples of mental accounting.

Create bank sub-accounts for the categories for which you need to save — e.g., down payment, car, vacation, Christmas presents, furniture, quarterly tax payments, etc. If you can, use payroll deductions to fund these accounts (see #1). If not, do automatic debits from your checking account the day after each paycheck is deposited.

As with a lay-away plan, spend the money after you’ve saved it.

7. Minimize debts.

Avoid taking on debt for expenses other than a car, a home, education, and true emergencies. Anything else — vacations, furniture, weddings, travel, taxes, living expenses — should be paid in full with money you’ve already saved (see #6).

8. Actively manage your debts.

Generally, pay off the highest interest rate debt first. Student loans usually take priority because defaulting on those will get you into the most trouble. If you already have some emergency savings, it usually makes more sense to pay down your debts more quickly, rather than saving additional money in a low yield savings account.

9. Tame social spending pressures.

Social pressure to spend can be intense — for both young and old. Try sharing your concerns with friends and family and you may find that not only do you get support but they may be relieved that you are brave enough to say something for which they are feeling the same pressures. If that’s the case, you can unite in your efforts to save more.

10. Take advantage of your employer’s incentives.

Your employer may offer you incentives such as a 401K match, a contribution to a health savings account, or an employee stock purchase plan where you can buy company stock at a discount. Take maximum advantage of any free money your employer offers.

11. Take advantage of tax incentives.

Similarly, the IRS offers various tax incentives to save. These include the well-known 401K and IRA retirement accounts but also other options such 529 accounts for college savings, health savings accounts for high deductible health plans, flexible and dependent care spending accounts, and Roth IRA conversions (which can make sense if your income is temporarily low). Take everything the IRS offers.

12. Save windfalls; don’t spend them.

Many of us will receive windfalls — large or small — from time to time. Whether they are birthday gifts, tax refunds, pandemic stimulus checks, work bonuses, inheritances, or anything else, don’t spend them. Save these funds or use them for emergencies.

Effective saving strategies are like other good habits you develop — eating, sleeping, exercise, etc. — small changes over long periods can make a big difference.

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