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How to save money: A beginner's guide

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Emergency fund

The decision to start saving money can raise a lot of questions. Yet once you know the basics on when, where and how to save money, you will find that the primary key to success is to start saving as soon as possible and keep doing it every day.

Ready to begin? Below are some of the saving goals you should pursue, the vehicles you should consider for saving and a few everyday tips for building savings more quickly.

Key savings goals

When you start saving, don't focus solely on far-off goals like retirement. Life involves a series of savings goals that allow you to start small and eventually ramp up to the big task of building a retirement nest egg.

Here is how that series of goals might go:

  1. Emergency fund. This is money you have set aside to cover surprise costs. Those can be anything from a car repair to having to live off your savings during a period of unemployment. You may need this at any time, so the time to start building an emergency fund is now. Keep at it until you have about six months of expenses saved.
  2. Your next car. A car is a major expense, and while you might not be able to save the entire cost of one, the more of a down payment you build up, the less interest you will end up paying on a car loan. This in turn will help you save more toward your next goals.
  3. Down payment on a home. While low-down-payment mortgage loans may be available, keep in mind that making a larger down payment may allow you to qualify for more favorable terms on your mortgage. Once again, saving now helps you save more in the future.
  4. College for your children. Given the cost of tuition, the time to start saving for college is as soon as you have a child. If you have multiple children, you will need to pick up the pace of saving -- and hope for scholarships!
  5. Retirement. This may seem a long way off, but it is also an especially big target because retirement can last so long. According to the Census Bureau, the average man in America is expected to live another 17.1 years at age 65. The average 65-year-old woman will live for another 19.8 years. It takes many years of saving to fund retirement over periods that long.

The tricky thing about this sequence is that these goals overlap. You cannot afford to wait for one to be completed before starting to save for the next one, or else you will never have time to get them all done. So, your savings are going to have to multitask, pursuing multiple goals at once. Knowing where to put your savings for each goal will help you organize this effort.

Where to put your savings

Here are some options for where to direct your savings, and some notes on how each fits with different savings goals:

  1. Savings accounts. Savings accounts, and their close relative money market accounts, are designed to give you immediate access to your money when needed. However, they are not intended for the high volume of transactions associated with a checking account. That characteristic of immediate though infrequent access is an ideal fit for an emergency fund.
  2. Certificates of deposit (CDs). These are deposit vehicles that require you to commit to keeping your money in the account for a specified period of time. In return for that commitment, CD rates are typically higher than savings account or money market rates. Because you can choose the length of your commitment, CDs are a good match for planned future expenses such as a down payment on a car or house. You may have to accumulate money first in a savings account and then switch to a CD, because CDs typically require the entire investment upfront.
  3. Education funds. A section 529 plan allows you to save for educational expenses without having the earnings on those savings taxed. A variety of state and educational institutions sponsor 529 plans that offer multiple investment choices. If you start saving when your child is very young, you can invest these savings in growth instruments for several years before downshifting to more conservative investments as your child approaches college age.
  4. Retirement plans. 401(k) and IRA plans offer tax advantages that help you grow your money over the long term. This typically means having some of your money invested in growth instruments, and given the length of the typical retirement, you may want to keep a portion invested for growth even after you reach retirement age.

Nine everyday ways to save more

Now that you have seen a variety of savings goals and vehicles, it is time to start making it happen. Here are nine ways you can increase your savings contributions:

  1. Bank your raises. Do you feel you cannot afford to save because your paychecks are just barely covering your expenses? Fine, but the next time you get a raise, commit to directing a substantial portion of that raise toward savings.
  2. Use automatic transfers. People often have good intentions for saving money, but then something else comes up to spend the money on. You can reduce this temptation by having money automatically transferred into savings vehicles every time you get paid. As a bonus, some employers will even kick in a contribution when you have money deducted out of your paycheck into a 401(k) plan.
  3. Consolidate your car trips. In an increasingly suburban society, you may have to drive a few miles to get to the nearest commercial area. That means every time you want to go shopping, drop off the dry cleaning or go out to dinner, you are racking up some unproductive miles. Minimize those miles -- and the cost of them -- by scheduling your trips to consolidate as many errands as possible.
  4. Comparison shop online. This does not necessarily mean do all your shopping online -- sometimes, in-store pick-up can be cheaper than delivery -- but at least do your research online. This will eliminate unnecessary travel and help you get the best bargains.
  5. Plan your menus. According to one estimate, the average American family throws out 25 percent of the food it buys. Wasted food means wasted money, so to cut down on that waste, plan your menus so you can coordinate your food-buying according to your needs. This will help you match the quantities you buy with the amounts you plan to serve, and help you make sure you do not buy food you won't be able to use before it goes bad.
  6. Bring your lunch. If you save just $5 each working day by packing a lunch, it would add up to over $1,000 a year. As a bonus, you will spend less time waiting in lines, and be less tempted to overeat.
  7. Find a no-fee checking account. Free checking accounts have become scarce, but they still exist. Finding one that does not charge a monthly maintenance fee will save you an average of about $150 a year.
  8. Bank online. Choosing an online-serviced account over a branch-serviced account can help you avoid maintenance fees and statement fees, and will generally help you earn higher savings account rates. On top of that, cutting out trips to the bank should also save you time and money.
  9. Opt out of overdraft protection. At an average of about $32 per occurrence, these fees can be an expensive price to pay for overdrawing your account by a few dollars. Opting out of overdraft protection may mean having a transaction declined on occasion, but this will save you money and help you develop the banking habits needed to avoid such incidents in the future.

This is just the beginning. There are plenty of other ways to save money. But these are examples of simple habits that you will barely notice once you put them in motion, yet they will be working every day to help build your savings.

More from MoneyRates.com:

The best checking accounts: Why finding one is critical

A guide to CD, savings and money market accounts

American Express Bank: A review

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