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 save 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 pay yourself first. The money never finds its way into your checking account; you don’t see it and you don’t spend it. See my next point.

2. Use payroll deductions and mental accounting buckets to save first and spend later.

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

Create savings sub-accounts for the categories for which you need to save — e.g., down payment, car, vacation, Christmas presents, furniture, engagement rings, weddings, 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.

Forget about buy now and pay later; you should save first and spend later.

3. Set a target and track your spending.

Know your overall spending each month. Don’t track every last 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 Mint.com but a simple two-column spreadsheet with the month as column 1 and your total spending amount as column 2 works well and is easy to maintain.

4. 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 medium-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.

Actively manage expenses such as mobile phone, internet/cable, and all your TV apps. Ensure that you use what you have and you’re not overpaying for what you don’t need.

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

Define for yourself and/or align with your partner on what’s discretionary. 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.

6. 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 dangerous hedonic treadmill that will be hard to stop. You’ll have more stuff but you won’t be happier.

Instead, when your income grows, save more. One way is to increase your 401K contribution rate whenever you get a raise. Another way is to start saving now for something you’ll want later (see #2).

7. Housing is probably your biggest expense item.

Regularly reconsider your housing choice. For example, are you now an empty-nester; can you take on a roommate; are you now working from home permanently and could consider a lower cost area, etc.? Don’t assume your housing cost is permanently immutable.

8. Use debit if credit cards are a challenge for you.

If you find yourself keeping a balance or over-spending with credit cards, put them away and use debit 100% of the time. Save the credit cards to be used only in emergencies. The points aren’t worth it. If you start feeling some anxiety every time you pull out your debit to buy something, that’s a feature, not a bug of this approach. You want to think twice before you swipe.

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, unite in your efforts to save more and spend less.

Fight FOMO, YOLO, and peer pressure to spend; don’t give in to them.

10. Minimize debts.

Avoid taking on debt for expenses other than a car, a home, education, and true emergencies. For anything else, pay in full with money you’ve already saved (see #2).

11. Manage your debts.

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

12. 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. Don’t leave behind any free money your employer offers.

13. Take advantage of IRS 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.

14. Save windfalls; don’t spend them.

Many of us 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, pay off consumer debts, or use them for emergencies.

Effective saving strategies are like other good habits you develop over time — small improvements over long periods compound into big benefits.