As important as saving money is, it can be a lot easier said than done, especially when you’re new to it. If you’ve always been living paycheck to paycheck, the idea of having any extra money left over at the end of the month can seem like a distant dream.
With lots of different advice and different strategies, it’s important to start at the beginning. We’re going to try to break down how to save money in simple terms by answering some of the most important questions.
3 Important Questions to Ask About Saving Money
Before we dive into specific tips and tactics that may help you save money, we’re going to try to answer some important questions about saving money to help give you a better understanding of the process in general.
1. Is Investing Money and Saving Money the Same Thing?
While they both play an important role in your life, there’s a big difference between saving and investing, and understanding these differences can have an impact on your long-term financial profile.
The idea of saving money is to put your hard-earned cash into accounts that have a very safe profile and can be accessed relatively easily in a short span of time.
On the other hand, when you invest your money, you’re buying an asset that you think will grow in value in the long run and give you a good return on your investment. This could be things like stocks, real estate, bonds, and more. The value of these investments may go up and down over the years, but the idea is that they’ll provide a healthy return in the end. However, investments are generally harder to access in the short term.
While a lot of the different ways to save money can be relatively straightforward, investing your money may seem a little more daunting and out of your depth if you have no experience with it. We recommend you talk with qualified professionals to help you get started.
2. How Much Money Should You Save?
Even if you already have some creative ways to save money in your back pocket and feel confident in your ability to implement some healthy financial habits into your life, it’s still important to know how much money you should be saving.
While the idea of “the more savings, the better” may be true in a general sense, there are still a lot of variables that come into play when it comes to putting that into real terms. You’ll need to consider things like your income, the cost of your rent or mortgage payments, any outstanding debt payments from installment loans or lines of credit, and your general lifestyle.
While you’ll have to think about these things and look at your budget to figure out how much you can and should be saving, when it comes to saving money for something like an emergency fund (which should be one of your first goals when it comes to saving money), the general idea is to have around six months’ worth of living expenses saved up. Keep in mind that this number can vary depending on your household. While you won’t get to this number overnight, with responsible spending and savings habits in place, you can get there over time.
If you need a more specific framework to help you figure out how much money to save, check out this guide on the 50/30/20 budget rule!
3. Should you Focus on Paying Off Debt or Saving Money?
If you’ve got a mountain of debt to deal with, this can feel like a big hurdle in your quest to save money. The key is to try to assess what type of debt you have and balance this with your savings goals as best you can.
When you’re trying to make the decision of whether to contribute to your savings or pay down your debt, it may be a good idea to start with any outstanding high-interest debt you may have. The interest you’re paying on this can have a big impact on your ability to save, so it may make sense to pay this off first.
If you have any low-interest debt, it may make sense to split your debt and savings payments a little more evenly between the two. The key is to assess your financial situation and find a healthy balance that’ll help you save money without handcuffing you in the end.
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