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Most Americans don’t have enough saved.
According to a 2023 Bankrate survey, more than half of American adults don’t have the savings to cover three months’ worth of expenses. Around one in five have no emergency savings at all.
There are many reasons why it’s hard to save, but the consequences of not saving are serious.
Without savings, unexpected expenses or emergencies can become financial crises. You may turn to high-interest credit cards or loans to cover your costs, leading to a cycle of debt and financial stress. Without savings, you may also struggle to reach your financial goals, says Francisco Ayala, certified financial planner at the Coleridge Group.
“Households don’t realize that being perpetually in debt diverts their income into an endless cycle of playing footsie with their creditors and robbing them of the opportunity to use compound interest to their advantage, he says.
Why it’s hard to save
There’s no shortage of reasons why people struggle to save.
The cost of living has been increasing in response to higher inflation. Expenses like rent and childcare are more expensive, leaving less disposable income for saving.
Recent wage growth has also been stagnant for many Americans. It becomes harder to save without significant income increases, especially with rising costs.
Many Americans also carry lots of debt, including student loans, credit card debt, and mortgages. Debt payments can consume a significant part of your income, leaving little room for saving.
Saving money is essential to achieving financial stability and reaching your long-term goals. Just because you’re struggling to save now doesn’t mean you’re stuck here forever. Once you know some of the factors holding you back, you can start building a plan to save more.
How to save more
Whether you’re looking to build an emergency fund, save for a down payment on a house, or plan for retirement, it’s never too late to start saving.
If you feel like you’re behind on your savings, you can catch up and get back on track in several ways. Here are six practical tips to help you boost your savings and secure your financial future.
1. Create a realistic budget
The first step to building your savings is to take a close look at your expenses. Analyze your monthly spending habits and identify areas where you can cut back. This includes reducing subscriptions, dining out less often, or shopping for better deals. Making small but significant changes to your spending will free up extra money for savings.
Once you’ve identified areas where you can save, you should create a realistic budget. A budget acts as a roadmap for your finances, helping you allocate your income effectively.
Start by listing all your sources of income and then prioritize your expenses. Set aside a specific monthly amount for your savings goals, treating it as a non-negotiable expense.
Popular budgeting methods include zero-based budgeting and the 50/30/20 budget. You can use a spreadsheet or an app to make things easier to track. It is important to find a system that works for you and continue to use it going forward.
2. Set specific goals
Rather than a vague, general idea to save money, set specific savings goals. A clear goal can give you the motivation and focus to save.
Determine what you’re saving for. Set specific targets and break them down into manageable milestones. This approach will help you track your progress and stay motivated.
If you don’t have an emergency fund, that should be your first savings goal to focus on. But there are likely other things you want to save for, such as a down payment on a home, a vacation, or retirement. Some online savings accounts help you set aside money for each individual goal.
3. Reduce high-interest debt
Building significant savings is difficult with a large amount of high-interest debt. Payday loans, personal loans, and credit cards come with double-digit interest rates, which can grow rapidly over time.
Focus on paying off your high-interest debt as soon as possible. This will free up more money to put towards savings and help you avoid wasting money on interest payments.
Two popular ways to pay off your debt include the snowball method and the avalanche method — but you should do whatever works for you.
It is possible to save while paying off debt. Most experts recommend building a small emergency fund before tackling your high-interest loans.
5. Avoid lifestyle inflation
In theory, saving money should become easier as we earn more. But that’s not always the case.
“Our discretionary expenses tend to increase with our growing income, which can impact our overall lifestyle,” says Ashley Folkes, a certified financial planner in Alabama.
This is known as “lifestyle inflation.” While the occasional splurge is fine, increasing your expenses as you earn more will slow your savings. That’s why it’s important to increase our savings as our income increases, says Folkes.
If your current income keeps you from saving more, consider finding ways to boost your earnings. This could involve taking on a side gig or freelance work, asking for a raise at your current job, or exploring new career opportunities. Increasing your income, even by a small amount, can greatly impact your ability to save.
5. Automate your savings
One of the easiest and most effective ways to catch up on savings is to automate the process.
Set up an automatic monthly transfer from your checking account to your savings account. Most online savings accounts offer this feature. This removes the temptation to spend the money elsewhere, ensuring you regularly save.
6. Start small (but start now)
Many people believe saving money requires large sums or drastic changes in their lifestyle. But the truth is, every little bit counts, and starting small can have a big impact over time.
Saving is a habit; like any habit, it takes time to develop. Starting small allows you to focus on building that habit of saving regularly. Begin by setting aside a small percentage of your monthly income, even if it’s just a few dollars.
As your savings grow, you’ll have a safety net for unexpected expenses, be better prepared for emergencies, and get closer to reaching your financial goals.
Where to put your savings
Once you’ve started saving, it’s important to put your money in a safe place that maximizes your growth. Here are some options:
- High-yield savings account: These accounts offer competitive interest rates, often over 5%. They are also accessible, allowing you to withdraw funds when needed. Remember that interest rates aren’t fixed and may fluctuate over time.
- Certificates of deposit (CDs): With a CD, you agree to keep your money deposited for a specific period, such as six months or a year. In return, you receive a fixed higher interest rate. CDs are a good option if you can lock your money away for a certain period and don’t need immediate access.
- Money market accounts: These accounts function like checking accounts but offer higher interest rates. Money market accounts often have high minimum balance requirements and may require a larger initial deposit. These accounts are a good choice to earn a higher interest rate on your savings while maintaining some liquidity.
- Investment accounts: Consider investing if you’re saving for long-term goals like retirement. Accounts like individual retirement accounts (IRAs) or brokerage accounts let you invest in stocks, bonds, and mutual funds. Remember that investing involves risk, and it’s important to consider your risk tolerance before investing.
- 401(k) or employer-sponsored retirement plan: If your employer offers a retirement plan, such as a 401(k), take advantage of it. These plans often provide tax advantages and may offer matching contributions.
The best place to put your savings will depend on your financial goals, time horizon, and risk tolerance. You can always have multiple savings accounts for each of your savings goals.
The bottom line
Saving is a journey, and reaching your goals may take some time. Remember to regularly review and reassess your strategy to ensure it aligns with your goals and financial situation.
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