Today more than ever, technology can help you save more money than ever before! I have plenty of articles discussing how to save money, but I want to take some time to discuss how to put money aside each month. This process is different from comparing prices or canceling subscriptions. I want to go over strategies to help you ensure that your savings grows consistently!
Here are my tips to show you how to put money aside each month!
How to Put Money Aside Each Month
Automate Everything
The basis of saving effectively is to automate your savings. This is so important because we have a tendency to forget to save money, or transfer money back and forth between accounts. Or even self-sabotage by reducing the amount we transfer to our savings account. We can eliminate our own human tendencies to sabotage our savings through automation! Once you start automating your savings, you will see how easy it is to save your money.
In fact, once I started automating, the amount of money hitting my savings accounts increase significantly! Seeing the money in each account go up every month is so motivating because it shows me how easy it is to save money. It feels so good to see how each account is a little closer to my savings goal!
Before I started automating my savings, I had a horrible habit of reducing how much money I transferred to my bank account because I wanted to spend it instead.
Automating your savings takes away the step where you have to decide how much you will save. I don’t have to make a decision about how much money I will save from each paycheck because that decision has already been made.
After automating my savings, my lifestyle has also naturally adjusted to spending less because my full paycheck never hits my bank account. However, I do believe that you should save in a step-wise fashion. For example, if you currently live pay-check to pay-check, don’t suddenly attempt to save 50% of your net income. Instead, funnel 5-10% to your savings account and start keeping track of your spending each month. Once you start seeing your savings increase, you will feel the motivation to find more ways to save money to reduce your overall spending and increase your savings.
Decide how much to save every month
Dave Ramsey recommends saving at least 15% of your income for retirement but depending on when you plan to retire, you may need to save more or less. There are many retirement calculators online that will give you a sense of how much you should be saving. Check out the ones by Fidelity here. If you aren’t currently saving money, you may need to work up to the savings recommendations of Dave Ramsey or Fidelity, but that’s ok! Everyone starts somewhere and I encourage you to take a look at your finances and see where you can start saving money.
Emergency Fund
Priority Number 1
This is your number one priority! If you don’t already have an emergency fund, I highly encourage you to set aside money for an emergency fund first! The purpose of an emergency fund is to cover unexpected expenses with cash. A good rule of thumb is to save about 3-6 months’ worth of expenses. If you have a lot of consumer debt to pay off, $1000-$2000 may be sufficient until you pay off your debt. Some people choose to save an entire year’s worth of expenses. The amount depends on your personal financial situation and your comfort level.
Decide how much money you will need
I personally have about 6 months of expenses saved. So, if I were laid off from my job tomorrow, I have the cash to survive for 6 months. But this money isn’t only for losing your job. It can be used for other emergencies too! Other emergencies include replacing a broken furnace or repairing your car. Just remember to replenish your emergency fund if you spend it.
Once you decide how much money you need for your emergency fund, it’s time to set up a separate bank account specifically for your emergency fund. I recommend using a bank account without ATMs or brick-and-mortar stores. The account should be slightly inconvenient to access. The harder it is to access the money in this account, the less likely you will use it for something outside of an emergency.
Direct Deposit from your paycheck
After you set up your bank account, set up direct deposit to that account. How much of your paycheck do you want to save? Again, if you live paycheck to paycheck, start small. Consider only saving 1-3% of your net income at first. As you become more comfortable with a smaller paycheck hitting your checking account, increase the percent you save. Keep increasing the amount you save until you feel uncomfortable. However, don’t save so much that you go into debt. There is a balance between being slightly uncomfortable and going into debt. Everyone is a little different.
I started off saving about 10% of my income. As I continued tracking my expenses and reducing my savings, I was able to increase my savings to about 50% of my net income. Again, everyone’s financial position is different, so play around with your numbers and find a savings rate that’s doable for you! If I can save a large chunk of my income, so can you!!
Trust me, this process is really simple and after you adjust to spending a little bit less, saving money will happen really easily! You won’t even need to think about saving, it will just happen!
Finally, once you have reached your emergency fund goal, it’s time to move onto another savings goal.
Health Savings Account (HSA)
HSA’s are used in conjunction with high deductible insurance plans. If you don’t have a high deductible plan, then skip this step. If you do have an HSA, know that these are fabulous ways to save money!
HSA’s are like personal savings accounts where the money is taken out of your paycheck pre-tax. Many of them also collect interest and can grow tax-free over time and if you spend the money on medical expenses, you aren’t charged a capital gains tax. This is the triple-tax advantage that you get from an HSA.
If you are over age 65, you may spend the money on non-medical expenses. However, you will have to pay taxes on the portion you spend.
Pre-tax savings is one of my favorite methods to save money. So, if you have this type of account, I highly encourage you to contribute as much as you can. The maximum amount that you can contribute in 2021 is $3,600 for an individual and $7,200 for a family.
How to contribute to an HSA?
There are a couple of ways to contribute funds to an HSA. Once you set up your online HSA, you can link a bank account and contribute cash funds. You may also transfer money from one HSA to another to consolidate accounts. There is also a once per lifetime option to contribute funds from your IRA to an HSA.
However, this article is about how to put aside money each month. I recommend setting up a portion of each paycheck to go directly to your HSA. This is a simple and stress-free method to set up the savings. Trust me, you won’t miss the money and you can watch it grow in your account! Reach out to your human resources department to set up automatic deposits to your HSA.
Retirement Savings
How much should you put toward retirement accounts?
Many employers offer a 401(k) match, meaning that they will contribute a certain amount of money to your retirement based on your annual contributions. You should at least contribute enough money to meet the employer match because this is free money for you!
After you’ve met the 401(k) match, consider opening a Roth IRA. Roth IRA’s are retirement accounts where you put your taxed income. Then, the investment grows over time and after age 59.5, you can withdraw the money tax free!
Prioritizing contributions to your retirement accounts or your HSA depends entirely on your financial situation.
Other Savings Goals
After you’ve maximized the amount of money you put toward your retirement accounts, it’s time to set aside money for your other goals! This can be anything, ranging from vacation funds to clothing to rental properties to your financial independence.
I personally save for a mix of all of those things. The trick is lowering your expenses enough to save money beyond what you save for retirement. That is done through careful tracking and budgeting in your expenses with I have explained in these articles:
How to Track Your Monthly Expenses
5 Amazing Methods to Create a Budget
Once you nail down how to spend significantly less money than you earn, have an emergency fund, and invest in your retirement and HSA accounts, you simply pick how much of the extra money goes toward each goal. For example, let’s say you have $2000 after funding your retirement accounts to put toward your other goals every month. Maybe 15% goes toward vacation funds, another 15% goes toward home improvement goals, and 60% goes toward your financial independence goals.
Set up savings accounts for each different goal and set up direct deposits from your paycheck to each different bank account. You will have money saved so fast with this method!
Select a Bank Account
Once you have decided how much money you want to save toward each savings goal, I recommend having a separate savings account for each goal. If you need help picking out a bank account check out my article about savings account tips where I go over what to look for in a savings account!
Set up Direct Direct Deposit
After you set up a separate bank account, I highly recommend setting up a direct deposit. Again, the more you automate, the easier it is to save money and reach your goals! I personally had a lot of trouble saving until I set up a direct deposit for a portion of my paycheck to go directly to my savings account. This step is key and often overlooked by people trying to save money.
However, I can’t give you exact steps to set up a direct deposit. Most institutions and businesses have online portals for employees to set up direct deposits, so check your workplace for their portal. Then you will need your bank account and routing number. Double-check these numbers before you submit them to your workplace. The last thing you want to deal with is having your money go to someone else’s account by accident.
My institution also gave me the option to pick how much money I want to deposit to my new bank account from each paycheck. I had the option to select either a monetary value or a percentage. I personally decided to select a percent because we occasionally receive raises based on the merit of inflation and I wanted to save a specific percent of my paycheck. But, I don’t think it really matters whether you pick a percentage or a dollar amount. Plus, you can always change how much money you deposit in the future.
If you’re first starting out, pick a low percent or monetary value to deposit into your savings account. I don’t want anyone to start creating debt on credit cards because they are putting away too much money in their savings. Saving 1-3% is better than nothing and again, you can always increase or decrease your savings rate as you proceed. I think most people will see how easy it is to save money with this method and will increase their savings slowly over time. That’s what happened in my situation anyway.
You also may need to wait 1 pay cycle before your employer starts depositing your savings into your new account. So if your paid in monthly increments, you may need to wait the entire pay cycle before money starts funneling into your savings account, but, trust me, it will!!
Now You’ve Learned How to Put Money Aside Each Month
We’ve covered a lot of ground to learn how to put money aside each month! Automation and using tax-advantaged strategies are huge when you’re trying to save money! When I started learning how to put money aside each month I implemented one step at a time. I first met my companies 401(k) match. Then I contributed to my HSA account. Then I contributed to my retirement accounts and finally, I started directing a percentage of my paycheck to my online savings account.
The process was slow and took over a year, but if you give yourself time, you will notice that your monthly spending adjusts to the amount of money you let hit your bank account. Before I started saving, I would have never guessed that I would be able to save so much money. This is a really easy process that doesn’t require a lot of time every month. So I highly encourage you to give it a try!
Let me know how it goes! And if you need help, let me know!