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You know that getting enough sleep, eating right and exercising are essential to staying healthy. But did you know saving money is just as critical to your financial health? Saving money is important because it can help you handle unexpected expenses, reach your financial goals and reduce stress. Here's why saving money matters and eight steps to successful saving.
Reasons to Save Money
Here are a few things saving money can help you do.
Handle Unexpected Expenses
An emergency fund gives you the resources to handle financial crises large and small, from a car breakdown to losing your job. Stow away three to six months' worth of essential expenses, and you'll be able to tap your savings to cover emergencies.
Learn more >> Steps to Build an Emergency Fund
Achieve Your Financial Goals
Saving money helps you reach short-term financial goals, such as buying a home or new car or taking a big vacation. Saving also fuels long-term financial aspirations like paying for your child's college education or retiring to travel the world. Regularly putting aside savings can help make these dreams a reality.
Avoid High-Interest Debt
Without savings, you may fall into the habit of using credit cards to pay for major purchases or unexpected expenses. If you can't pay the full credit card balance by the due date, however, any remaining balance begins to accrue interest—and a relatively small balance can quickly become a big problem.
Reduce Stress
Concerns about paying your bills can keep you up at night, put a strain on your relationships and keep you from doing your best at work. Saving money gives you a financial cushion to rely on. When you aren't anxious about making ends meet, you'll get more out of life.
Take Advantage of Opportunities
Your neighbor is selling the '66 Ford Mustang of your dreams for an incredible price. Your son is eager to go on his soccer team's summer trip to Europe. When you have savings set aside, you can jump on opportunities like these instead of passing them up for lack of money or relying on loans or credit cards to make them happen.
Enjoy More Freedom
Burned out at work and too busy to job hunt? If you have enough savings, you may be able to quit and support yourself while seeking a better job. Worried about an aging parent who lives across the country? Use your savings to move Mom closer and spend more time caring for her. A solid savings account offers the financial freedom to do what matters most to you.
How to Save Money
Ready to commit to saving money? Here's how to make it happen.
1. Make a Budget
Create a budget listing your monthly income and expenses, breaking expenses into essentials (such as rent) and discretionary spending (such as eating out). There are several budgeting methods to choose from. The 50/30/20 budget is a popular option that devotes 50% of your income to essentials, 30% to nonessentials and 20% to savings and paying off debt—with the freedom to adjust as needed.
2. Look for Ways to Save
If there's nothing left to save after your bills are paid, you'll need to cut back on expenses. Start with discretionary spending. See how much you can save by eating at home, canceling unused subscriptions, seeking discounts and reducing utility usage. Squeeze out more savings by taking in a roommate to help with rent, moving to a cheaper apartment or starting a side gig for extra money.
3. Set Savings Goals
Based on your budget, goals and time frame, decide how much to save each month. For instance, if you want to build a $2,500 emergency fund in one year, you'll need to save about $208 per month. If you want to save for several goals at once—an emergency fund, a home down payment and retirement, for instance—you'll need to prioritize.
4. Maximize Savings Growth
Optimize long-term savings using tax-deferred accounts such as an employer-sponsored 401(k) retirement plan or health savings account (HSA).
Stashing your short-term savings in a money market account, high-yield savings account (HYSA) or certificate of deposit (CD) can help it grow faster than a traditional savings account.
In September 2024, traditional savings accounts earned an average 0.46% annual percentage yield (APY). By comparison, money market accounts averaged 0.64% APY, 12-month CDs averaged 1.88% APY and some HYSAs had APYs of 5% or more. A savings calculator can help you compare the rates of return different savings accounts offer.
5. Put Your Savings Plan on Autopilot
Pay yourself first by automatically transferring money into your savings account each payday. You're less likely to spend money that never hits your checking account. You can usually set up automated transfers through your employer or using your bank's website or app. Some employers let you schedule transfers into several different accounts to conveniently save for multiple goals.
Learn more >> How to Split Your Direct Deposit Into Multiple Bank Accounts
6. Tackle High-Interest Debt
With credit card annual percentage rates (APRs) averaging 22.76% in May 2024, according to the Federal Reserve, carrying a balance could cost hundreds of dollars per month in interest. Pay off your credit cards so you can put that money toward savings instead.
You can use the debt avalanche or debt snowball methods to gradually pay down debt, or potentially pay it off faster using a debt consolidation loan. Personal loan APRs average 11.92% as of May 2024—less than half the average credit card APR—so a debt consolidation loan could save you substantial interest.
Another option is a balance transfer credit card with an introductory 0% APR. Transfer your existing balance to the new card, pay it off before the promotional period ends and you won't incur any new interest.
Learn more >> What Is a Personal Loan?
7. Save Your Windfalls
Use windfalls such as a work bonus, small inheritance, cash gift or prize, or tax refund to build your savings. When you get a raise, put part (or all) of it toward your savings goals and stick to your existing budget.
8. Track Your Progress
Track your spending and compare it to your budget to confirm you're staying on course. If your budget is so tight it's tough to stick with, build in a little wiggle room. If you find saving is easy, try saving even more to reach your goals faster.
Frequently Asked Questions
Saving money isn't nearly as much fun as spending it. Forgoing cocktails with friends tonight to save for a goal months or years in the future requires self control, especially with ads and peer pressure urging us to buy. A low or irregular income can make it tough to save; conversely, as your income rises, you might fall prey to lifestyle creep. It's also difficult to save money if high-interest debt eats up a big chunk of your income. Creating a realistic budget that allows for some "fun money," saving consistently and celebrating small wins can help keep your savings plan on track.
Ideally, you should save money and invest at the same time. However, sometimes you need to focus on saving. For example, if you have credit card balances accruing interest, paying them off before investing may make more financial sense. Since credit card interest rates are typically higher than the 10% annual rate of return stocks have historically delivered, paying off credit card debt offers a better return on your money than investing.
One exception to this "save first" rule: If your employer matches your retirement plan contributions, investing enough to max out the employer match provides a 100% return on your money. And generally, it's a good idea to invest for retirement regularly, even if you have to reduce your usual contributions to get through a tough period and begin rebuilding savings.
The best place for your savings depends on your goals. For short-term savings you may need to access quickly, like your emergency fund or vacation fund, high-yield savings accounts or money market accounts combine liquidity with higher APYs than traditional savings accounts. For mid-term financial goals, such as making a down payment on a home in five years, a CD can offer solid returns. Maximize long-term savings like college funds or retirement contributions by placing them in a tax-advantaged account where they have time to grow.
Choose savings options that are protected by the Federal Deposit Insurance Corp. (FDIC), which insures bank accounts, or the National Credit Union Administration (NCUA), which insures credit union accounts. The FDIC and NCUA typically guarantee balances of up to $250,000 per account holder, per account type, even if the financial institution fails.
The Bottom Line
Saving money requires some discipline. But just as exercising helps build a healthier body, following a savings plan can improve your financial health. Experian offers plenty of tools you can use to uncover savings on everyday expenses like car insurance and cable, phone and internet bills.