You know you should be saving.
Nearly half of all Americans don’t have $400 on hand to cover an unexpected expense. That’s according to the Federal Reserve.
You want to be in the other half. You want to have money stockpiled in case your transmission goes out. Or maybe you want to take that trip of a lifetime to Paris or buy your first home.
Whatever the case, building savings takes time, so you ought to get started today. Follow these six strategies to incorporate long-term savings into your budget.
Know your wants and needs
Saving money is important. Deciding why you’re saving is perhaps even more important.
Picking a purpose for your savings achieves a couple things:
- It may be easier to save when you know the money is going toward, say, your mortgage down payment than just into general savings. Consider giving your accounts nicknames — if your bank allows this — to underline the point. Some companies, including savings app Qapital, let you set multiple goals at once and allocates money to the various pots based on your rules.
- It allows you to tailor your risk appetite. If you’re saving for something that will happen in the next few years, perhaps your money is best placed in low-risk investments, like a high-yield CD. If you’re saving for something longer term, the stock market may be a better choice.
“If you have 15 to 20 years, you can go more aggressive because you have time” for market swings, says Certified Financial Planner Ted Snow, founding principal of Snow Financial Group in Addison, Texas.
Get into the right mindset
Once you know what you want, it’s time to set aside money for it. But shifting funds into a long-term account can be tough, especially if it means investing money you regularly spend at the coffee shop, drugstore or restaurants.
If setting aside money normally spent on entertainment leaves you feeling deprived, try changing your attitude.
An attitudinal adjustment may be more easily achieved for short-term goals. Case in point: Say you want to take a trip every year that will cost $5,000. Put aside $100 a week and you can make the trip a reality. This might mean eating at a restaurant one or two fewer times a week. By saying “no” to eating out, however, you’re saying “yes” to a big annual trip. See the difference?
This is where recurring and automated tools can help you. Reroute money from your paycheck directly to savings to curb temptation. Then use Bankrate’s simple savings calculator to see your savings grow.
Understand the power of compound interest
Setting aside money early on and watching it grow can be a powerful motivator.
To envision the potential of compound interest, consider the rule of 72, Snow says. Take the number 72 and divide it by the projected rate of return you expect to receive each year from an investment. This will reveal the estimated number of years it will take for that amount of money to double.
For example, say you invest $8,000 in a mutual fund with an average return rate of 8 percent. It will take approximately nine years (72 divided by eight) for that amount to turn into $16,000. The earlier you start, the more time your investments have to multiply.
Bankrate’s compound interest calculator graphically illustrates how money grows.
Track it online
The digital age has (theoretically) made saving money a lot easier. For starters, you can avoid things like overdraft fees by tracking your checking balance from your smartphone.
Also, there are dozens of apps designed to help you get better about saving money and not spending frivolously, ranging from Mint.com, a budgeting tool from Intuit that was a pioneer in the space, to newcomers like Varo Money, which launched in 2017.
Helping you not spend money has never been hotter.
Most diets have a cheat day in order to break up the monotony of clean eating. Saving money is like kale, quinoa and grilled chicken. Sometimes you need a greasy cheeseburger and fries.
Within a healthy discipline, treat yourself to something nice when you can. Maybe you splurge on a nice dinner when you’ve reached an incremental savings goal. But be sure to get right back on track to hitting the bigger goal.
Invest your raise
You got a raise at work. That’s great news. Now continue to live like you did yesterday.
One of the best ways to boost savings is to bank your raise since you’ve already grown accustomed to living on the old amount. Adjust your direct deposit so the extra cash flows directly to savings.
“Don’t get used to spending it. Live on what you have been living on,” Snow says. “It is going to be the easiest way to save.”