American Airlines saved $40,000 simply by removing olives from first-class lunches. This simple trick proves that small savings can lead to impressive results. Imagine what you could achieve by cutting unnecessary expenses and being mindful of your spending.
The first step to financial freedom is not opening your own business but building savings. Having this foundation will help you discipline yourself, learn how to allocate any budget properly, and not depend on external circumstances. In this article, we will discuss how to save money and save properly. Check out our top book recommendations: 'The Total Money Makeover,' 'The Simple Path to Wealth,' and 'Know Yourself, Know Your Money.'
Assess your personal finances
You may wonder where your money goes after payday. Is it scattered among various purchases? Do these thoughts resonate with you?
"Control your spending by focusing on your values, not on consumerism." — J.L. Collins, 'The Simple Path to Wealth'
The first step to budgeting is to analyze your monthly expenses carefully and understand your spending habits. In 'Know Yourself, Know Your Money,' Rachel Cruze emphasizes the importance of understanding financial behaviors. She notes, "Money is just a magnifying glass: It makes you more of whoever you are."
Record your expenses to understand your spending habits
Observe where your money goes and identify the main categories of expenses. Nowadays, there are many options for automating and maintaining a personal budget with budgeting apps, or you can track money movement through online banking. You can even record your expenses in each category either every day at a convenient time or immediately after purchases.
In a family budget, expenses include all family costs, both required and non-essential. Required costs typically include:
Rent or mortgage payments
Monthly bills, such as the internet and mobile
Grocery expenses
Transportation expenses, such as taxi fares or car maintenance costs
Family expenses, like baby products and school fees
Repayment of personal loans or credit card debt
Medical treatment
Expenses for a pet
While non-essential expenses include:
Vacations
Alcohol and tobacco
Restaurants and entertainment
Takeaway coffee or tea
Hobbies and sports
Remember that expenses should not exceed income. That is the most important rule on the path to financial freedom. If your expenses exceed income, you urgently need to change something. You can start working on reducing overspending, increasing revenues, or better yet, both.
Quick and smart money-saving tips
"If I can control the guy in the mirror, I can be skinny and rich." ― Dave Ramsey, 'The Total Money Makeover'
You can save money today by taking a few simple steps. Here are some practical money-saving tips to consider:
Make shopping lists according to your meal plan before going to the grocery store to avoid spending unnecessarily. Be sure to eat before you go — a hungry person will buy more unnecessary products.
Buy clothes during off-season sales. Purchase summer clothes in late summer or early fall and winter clothes in late winter or early spring. This strategy allows you to buy high-quality garments at significantly lower prices.
If you like grabbing coffee outside, invest in a coffee machine for your home or office. You'll enjoy delicious, home-brewed coffee while spending much less over time.
Audit your subscriptions. Do you need all those subscriptions you're paying for? While streaming services like Netflix or your online yoga membership might be essentials, many of us pay for subscriptions we rarely use or have forgotten about. Review your bank statements, check your app store subscriptions, list everything you pay monthly, and cancel what you don't need (and turn off auto-renewal). Apps like Emma can help track down unnecessary subscriptions. Also, consider comparing competitors' rates or negotiating with your current provider to save money.
Install a smart thermostat to save up to 26% annually on heating and cooling costs. These devices detect when you're home, adjust temperatures when you're away, and can pre-heat or cool your home before you arrive.
Refinance your loan with a lender for a lower interest rate. This method is especially effective for saving money if rates have dropped since you first got the loan. For example, reducing a $275,000, 30-year mortgage from 4% to 3% interest rate could save you over $250 monthly — that's $3,000 yearly! What could you do with that extra money?
Get out of debt. Credit cards might help you buy nice things, but you risk accumulating huge debts if you only make minimum payments. Focus on eliminating this financial burden.
Set up automatic transfers from your checking account to your savings bank account. This small but effective step ensures you save consistently after each paycheck. Making these funds temporarily unavailable would also be a good idea to prevent impulsive spending.
"Long-term wealth is built through patience and persistence, not by chasing hot trends." — J.L. Collins, 'The Simple Path to Wealth'
Implementing a sustainable money management
"You have to reach the point that what people think is not your primary motivator. Reaching the goal is the motivator." ― Dave Ramsey, 'The Total Money Makeover'
Budgeting is about achieving your financial goals. Whether buying a home, saving for a vacation, or paying off your loans, you must identify what you want to focus on.
Set specific goals for the savings plan
Most people try to save money abstractly "for a rainy day." This approach rarely works. The human brain naturally resists and doesn't want to imagine a rainy day coming. Subconsciously, we might even think a bad situation won't happen if we don't save for it.
Psychologists say your savings goals should be specific, positive, and measurable. You should save money with pleasure and anticipation. Here are some saving goals for potential savings targets:
Specific purchases: Save for tangible items like a car, home repairs, appliances, or new gadgets.
Short-term goals or emergency savings: Create short-term security to feel independent and calm, knowing you have covered 3-6 months of expenses.
Future investments: Plan for significant life events, such as wedding expenses, paying off student loans, purchasing a home, or building retirement savings.
Use method 50/30/20 for your budgeting
The 50/30/20 rule provides a practical framework for managing your personal or family budget. This approach helps you realistically distribute monthly expenses without financial or psychological pressure.
Here's how to apply this method:
50% for needs: Allocate half your income to basic needs like utilities, food, health and car insurance, and transportation for daily living.
30% for wants: Dedicate this to spending that lets you live comfortably, like dining out, entertainment, and hobbies.
20% for savings: Direct this share toward savings, such as retirement, emergency fund, or home down payment. It can also be used for debt repayment.
In 'The Simple Path to Wealth,' Collins points out that the lines between needs and wants are continually and intentionally blurred. He suggests saving and investing 50% of your income while avoiding debt, which he argues is perfectly doable with proper planning.
"Spend less than you earn—invest the surplus—avoid debt. Do simply this and you'll wind up rich. Not just in money." — J.L. Collins, 'The Simple Path to Wealth'
Exploring additional income streams
"Life choices are not always about the money, but you should always be clear about the financial impact of the choices you make. Sound investing is not complicated. Save a portion of every dollar you earn or that otherwise comes your way." — J.L.Collins, 'The Simple Path to Wealth'
If you have free time or money, consider increasing your income or finding additional revenue streams:
Start a side hustle: Look for side hustles outside your main job to earn extra money. You could walk dogs, resell clothes, tutor, or do freelance work (writing, editing, designing). Remember not to overextend or force yourself, as that's a direct path to burnout and demotivation.
Sell clothes and home items after decluttering: Cleaning your closet can earn extra cash. Resale sites make it easy to sell unwanted items. A cluttered wardrobe can lead to feelings of losing control and impact your finances. Organizing your closet and home is a smart way to boost your budget, so consider starting a seasonal clean-up.
Live in your investment property: You can increase your mortgage and buy a home with potential investment income. This strategy, also known as "house flipping," can give you extra cash that you can use to pay off your mortgage or even live for free.
Open a certificate of deposit (CD): It is a fixed-term deposit with a fixed interest rate. Here's how you can earn: Create a "CD Ladder" by opening multiple CDs with different terms (e.g., 6 months, 1 year, 3 years) to access your funds regularly and take advantage of higher rates over the long term. Invest in long-term CDs with rising rates, as long-term CDs can provide a higher return if interest rates are stable or increasing.
How much can you earn?
Imagine you put $10,000 in a CD at 5% interest for 3 years. At the end of the term, you'll have $11,576 (before taxes).
Try a direct deposit account: It is a high-interest account that gives you easy access to your money (but there are limits on the number of withdrawals). Don't leave money in traditional savings accounts in big banks like Chase or Wells Fargo. They typically offer less than 0.01% interest. If you put $10,000 in a high-interest account at 4.5% interest, you'll have $10,450 in one year and $12,432 (tax-free) in five years.
Open a high-yield savings account: These offer higher interest rates than traditional ones. Flexibility in access to funds allows interest to compound monthly or daily, enhancing returns through compound interest. Online banks usually offer the best rates (Ally, Marcus by Goldman Sachs, Capital One 360).
Boost your savings and knowledge with Headway financial summaries
When you have a plan of action and know how to do better, the path becomes brighter and more achievable. Save and experience financial freedom. You can make your dreams a reality by saving and using your finances wisely.
Continue expanding your knowledge about budgeting, finances, and frugal living with Headway. Our Headway library contains bestselling books on relevant topics. Take our personalized quiz to set specific learning goals tailored to your needs. The app offers book summaries in both audio and text formats, depending on your preference. Enjoy "healthy food" for the mind every day!
