The Secrets To Saving Money

Father watching kids put change into the piggy bank

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Would you be interested in learning the secret to saving money? Fortunately, there are a few secrets that can be used to save money, even if it doesn’t feel like you have any money to save. However, these secrets are really not secrets at all, but instead are best practices in creating a budget, staying out of debt, and building your savings.

Saving Money Secret #1: Budgeting

First, you need to create a budget. Before you can even dream about saving money, you have to know where your money is going. How can anyone decide where to make cuts in spending or where to find extra cash to save if they don't know how their money is being spent? They can’t, and that's why a budget is so important.

Creating a budget doesn't have to be an onerous process. However, you do need to find out where your money is going. You want to make a list of your monthly expenses including housing, utilities, groceries, debt payments, and entertainment. Once you have a clear picture of how much you're spending in a typical month, you can look for trends and problem areas. After you’ve found the problem areas, you’ll have a better idea of where you can cut back and by how much. For example, you might go out to dinner multiple times, or order expensive takeout. Perhaps you can cut that back and apply that money to your savings. You'll also need to write down your monthly income after taxes have been deducted.

As you can see, the idea is to paint a picture of how much money you take in and where your money is going, but you don't have to track every single dollar spent.

Saving Money Secret #2: Paying Yourself First

After you’ve identified where your money is going, hopefully, you should have a few spare dollars to put aside into your savings or a retirement plan like a 401(k). However, there’s another secret to saving money: paying yourself first.

If you’re like most people, you probably wait until your paycheck is deposited to your checking account, pay the bills, and buy the weekly groceries before deciding how much you can afford to deposit into savings. By then, the amount left over may be small, and you might worry that you might need those few dollars later in the week, so you avoid putting any money into savings. This decision can be a big mistake.

You need to think of your savings just like you would any other bill. When your electric bill comes due each month, you make sure it gets paid. You need to treat saving money no differently. If your goal is to save $100 a month, then think of your savings goal as a $100 bill that needs to be paid. If you think about savings in terms of a bill that needs to be paid, you’re more likely to make that deposit and build up your emergency fund.

Just thinking about your monthly savings as a bill isn’t enough, and that’s where you have to pay yourself first. You need to create an automatic savings plan that will automatically deposit money into your savings account before you even have a chance to spend it. This can be done right through your employer’s direct deposit or via a recurring transfer with your bank. And just like magic, you don’t even miss the money going into savings each week, yet your savings account begins growing over time.

Saving Money Secret #3: Spend Less Than You Earn

This is the holy grail of personal finance, but if you can’t utilize this secret, you’ll never be able to save money. You have to spend less money than you earn, and there’s no way around that. It’s all about cash flow.

If you earn $100 and spend $110, you’re now at a $10 deficit. To cover the extra $10 spent, you might borrow from a credit card. Unfortunately, the borrowed money comes with an interest cost, which means you’re more than $10 in the hole. If you continue this process on a regular basis and with large dollar amounts, you can get into tens of thousands of dollars in debt.

As your debt increases, you may find yourself only making the minimum payments each month, which means that your payment may not even cover the interest on the debt. As a result, it can take years to pay off the debt, and when including the total cost of interest, you will have likely have paid far more than the original amount you borrowed.

You Can Save Money

The secrets outlined in this article are more like common sense principles. Most of us know that we need to budget our money, put money aside for the future, and stay out of debt, but many of us still can’t do it. Unfortunately, short of winning the lottery, there are no secrets to building wealth. These three sound money management principles are the foundation of personal finance.

One thing is certain. If you can budget your money so that you are spending less than you earn and put some of that money into a savings or retirement account before you have time to spend it, you will be able to save money and build wealth.