A Complete Beginner's Guide to Saving Money

Saving money, or the "saving habit"— as Napoleon Hill put it many years ago in his classic "Think and Grow Rich"—is the foundation of all financial success. Having money saved is what provides the means for you to take advantage of situations—whether it's going back to college, starting a new business, or buying shares of stock when the market crashes.

Saving Money vs. Investing

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There is a huge difference between saving and investing. Both saving money and investing money have their place in your life, but play very different roles. 

How you handle these can have big implications for your financial success, stress level, and how wealthy you ultimately become. It can even mean the difference between suffering through a recession or depression with white-knuckles or sleeping soundly through the night knowing you have enough spare liquidity on hand.

Saving money is the process of parking cash in extremely safe accounts or securities that can be accessed or sold in a very short amount of time.

Investing money is the process of using your money or capital, to buy an asset you think has a good probability of generating a safe and acceptable rate of return over time—even though it may decrease for years. Typically this means stocks, bonds, and real estate.

Saving a Few Dollars Really Does Matter

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Even if you are committed to saving money, you may find yourself falling into the trap of spending an extra $5 here, or $10 there, thinking, "It's not that much. I'll never miss it." Depending on your age, this could be a huge mistake. 

One of the cornerstones of saving money is understanding the time value of money, that is, the concept that $1 today is more valuable than $1 a year from now. This single money saving tip could help you transform your balance sheet over the next 10 years as you free up cash to put into reserves. 

The longer your money has to grow, the better for you.

How Much Money You Should Be Saving

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Everyone knows saving money should be a top priority and most people are smart enough to look for saving money tips, but how many people know how much money they should be saving? Most folks mistakenly believe that saving more money is better, saving less money is bad. 

While that's true in a general sense, depending upon your needs, lifestyle preferences, and income, the amount of money you need to save and have available in the event of an emergency or golden opportunity could be very different from your friends, family, and neighbors. The general rule of thumb is to have 3 to 6 months of living expenses saved in an easily accessible account.

The Key to Saving Money Is to Pay Yourself First

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The single best way to begin saving money is to use a technique called "pay yourself first." This technique has been proven time and again to cause people to change their behavior.

Simply put, it's establishing the discipline to put a certain amount of every paycheck into savings for your future before you pay any other bills.

Ways to Make Saving Money Easier

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Sometimes, saving money can be difficult. Life often throws us curve balls—unexpected events that impede our savings schedule and routine.

If you are struggling along the path to financial freedom, there are ways to make saving and investing easier.

Try making a game out of finding ways to spend $100 less each month. You can walk home rather than take the bus. Or order water instead of tea or coffee.

Set up automatic transfers from your checking account into an investment or savings account. Do the same thing with your paycheck. Or use an app, like Digit, to help you save automatically. The money you never "see" accumulates without it feeling like punishment.

Reward yourself and set goals for what you'll do when you reach certain savings levels.

Ways to Generate Cash for Your Savings

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If you want to know how to get rich, history has shown investing in good businesses is a good place to start. However, you must have the money to invest in these businesses, which means saving.

To help you start saving money today, change your habits.

If you use credit cards, pay off the full balance monthly and find a card that awards you with points for purchases that can be used to earn cash back.

Take a side job and use that income for your investments. The internet offers many ways to provide freelance services.

Paying Off Debt vs. Saving Money First

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Debts are often a big hurdle to beginning the process of saving money. If your debt is charging you 15% interest, and you don't have much cash left over after your expenses, it's easy to see why saving money can be a difficult task.

When deciding if you should start saving money or pay down debt first, focus on paying off any high-interest credit card debt, but squirrel aside even $25 per month to begin to establish a kitty so you don't have to depend on the credit card for all emergencies.

Low-interest debt can be worth paying slowly so you can get started putting money away with the potential to compound over the long-term for your retirement. In this case, think of it as a combination strategy.

How to Save the First $100,000

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Billionaire investor Charlie Munger has always said that the most challenging hurdle to becoming financially independent is saving the first $100,000.  

Once you cross that threshold, you have the money necessary to get bank loans to build a business or acquire real estate or make investments in the stock market that can have a real tangible change in your net worth if things work out well.

Understand the tax code to get every last cent that is coming to you. Reinvest your dividends and look for opportunities with low fees.

Where to Save Money for a Downpayment on a House

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If you are saving money for a downpayment on a house, you want to find safe places to invest it so the money stays safe until you are ready to make a purchase. 

FDIC-insured savings accounts and certificates of deposit are guaranteed by the government, so they are safe but won't generate a substantial return. Money market accounts at a bank are also safe for storage.

How Saving $19 Made Some Families $5 Million

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In 1919, families that got their hands on $19 by saving money were able to buy a single share of a well-known, hugely successful blue-chip stock. Today, that single share, with dividends reinvested, is worth more than $5 million.  

This was all possible due to the savings habit. It's important that you do not despise the day of small beginnings. No matter how small your savings account is now, with wise stewardship and disciplined cost-cutting, you can one day be wealthy. 

Article Sources

  1. Napoleon Hill. "The Habit of Saving," Page 5. Accessed May 25, 2020.

  2. Consumer Financial Protection Bureau. "My Savings Rule to Live By." Accessed May 25, 2020.

  3. MoneyCounts: A Penn State Financial Literacy Series. "Introduction: What Is Time Value of Money?" Accessed May 25, 2020.

  4. Vanguard. "What's the Right Emergency Fund Amount?" Accessed March 25, 2020.

  5. The University of Arizona Consumer Jungle. "The Savings Habit." Accessed May 25, 2020.

  6. InCharge. "How to Set Financial Goals: 6 Simple Steps." Accessed May 25, 2020.

  7. Consumer Financial Protection Bureau. "Credit Cards." Accessed May 25, 2020.

  8. Consumer Financial Protection Bureau. "How to Reduce Your Debt." Accessed May 25, 2020.