With inflation falling but fears of a recession looming, many Americans are looking for ways to put more money into savings and investments. Two key ways they can do this are by increasing their income and by cutting their expenses.
Whether you’re a young adult preparing for retirement, an adult in your 50s trying to pay off your mortgage, or a senior living on a fixed income, these savings and investment tips can help you save more, reduce debt, increase your income, and invest wisely.
1. Pay yourself first
Instead of setting aside everything that’s left over, save a portion of your monthly income as soon as you receive it.
One way to prioritize paying yourself is to set up automatic transfers from your bank account to a savings or investment account.
“Pick a percentage of your paycheck or a random number and let it calculate it for you. No need to think about it or backtrack; just let it do the math,” says Ronit Rogozinski, CFP, founder of Women+Wealth Solutions in Carle Place, New York.
2. Save for emergencies
An emergency savings account is the foundation of sound financial planning, but what exactly is an emergency?
True emergencies are those over which you have little or no control, such as serious illness or losing your job. Infrequent, predictable expenses, like car repairs or a trip to visit family, are not emergencies; they’re a different category of expenses for which you should save.
A good general rule of thumb is to have enough saved up to cover three to six months of living expenses.
If you have a habit of dipping into your savings when you don’t need to, move those funds into a separate savings account so they don’t dry up when you need them.
A recent Bankrate survey found that fewer than half of American households have enough savings to cover a $1,000 surprise expense, and many feel inflation is affecting their ability to save for emergencies.
If you have a habit of dipping into your savings for emergencies, transfer those funds to a separate savings account so they aren’t depleted when you need them.
3. Make a spending plan
A spending plan, also known as a budget, is a list of your monthly income and expenses. It helps you understand how much money is going towards both necessary and discretionary expenses, so you can make changes as needed. You can create a budget using an app, a spreadsheet, or cash envelopes, says Charlie Bolognino, ChFC, CFP, founder of Side-by-Side Financial Planning.
Your budget should include both recurring and one-time expenses, says Bolognino: “Being proactive in identifying even the smallest of one-time expenses that occur throughout the year, like property taxes, car registration, tuition fees, back-to-school shopping, and incorporating them into your budget can make a big difference in the accuracy and reliability of your plan.”
4. Spend less and save more
That’s easier said than done, but saving money often starts with spending less.
Of course, there are some things you can’t stop spending money on — you still need to make rent or mortgage payments, buy groceries, pay off debt, etc. — but for most people, there are some expenses you can cut back on.
The first thing to do when trying to cut back on your spending is to understand how much you’re currently spending and how you’re allocating your money. It’s easy to spend money without knowing exactly where it’s going. There are a few ways to learn more about your spending habits:
First, get copies of your recent credit card and bank statements and examine them closely. Pay attention to big expenses as well as purchases that occur frequently. For example, you might find that you’re spending much more money on takeout than you expected or going to the movies more often than you thought you would.
Consider subscribing to a budgeting app. These apps will track your spending and create easy-to-understand reports and graphs to help you see where your money is going. Some apps can even help you save money by helping you negotiate bills and cancel unused subscriptions.
Once you have collected this data, categorize your expenses into needs and wants. Items like groceries, debt payments, and rent are obviously needs. Takeout, movies, and vacations are wants.
Finally, think about the money you’re spending on your wants. Are you spending more than you expected on something? If so, find ways to cut back on that expense. Does the money you’re spending really make you happy? Or would you rather prioritize spending it on something else?
You don’t have to completely give up spending money on fun things like dining out and entertainment — it’s good to go out every now and then — but it’s equally important to cut back on your spending and consider your financial health.
Once you’ve cut back on your spending, don’t leave your newly saved money in your pocket, wallet, or checking account, where you’ll likely end up spending it elsewhere. Instead, put the extra money to good use by paying off debt or moving it into an out-of-reach savings account or certificate of deposit (CD).
“Cut out one discretionary spending habit and put the savings in the bank or towards paying off debt,” says Rogoszinski of Women+Wealth Solutions. These days, it’s easier than ever to make your money work for you. Many online banks offer savings accounts and term deposits with annual returns of more than 4%. You can also automate your savings, transferring money from your checking account on a regular schedule to help grow your savings balance.
Paying off your debts will free up money for savings and investments. Make a list of your debts and pay off those with the highest interest rates and smallest balances first.
5. Get creative to make money
Ways to make more money include taking on a part-time job or selling things you no longer need.
While long hours may seem like a burden, taking on a side hustle, even temporarily, can be a smart strategy to help you reach a specific savings goal. In fact, a Bankrate survey found that U.S. workers with side hustles make an average of $996 per month from their side jobs.
You can start a side hustle by identifying your skills and the tools and resources you need to turn them into a profitable business.
Another way to generate cash for savings is to sell unwanted items such as extra cars, used designer fashion, collectibles, musical instruments, jewelry, etc. To connect with potential buyers, consider websites like eBay, Craigslist, Poshmark, and Facebook Marketplace.
6. Take small steps towards savings
If you find it difficult to save money, start by setting aside $100 or $500 for a specific purchase or expense. Once you’ve made the purchase and are on track to save, continue to save that amount (or more) so that you can pay for other necessities with cash instead of a credit card.
If you can’t save money for big purchases or long-term investments, you may be living beyond your means. Small changes to your budget could help, but bigger changes, like finding cheaper housing or transportation, might be necessary.
7. Allocate your investment assets
Some investments offer a relatively good balance of risk and reward, while others are more volatile.
Generally speaking, younger people should invest more aggressively and older people should be more conservative.
If you’re new to investing, start with a variety of investments, such as mutual funds and assets of your choice. The goal is to diversify your investments without making your portfolio too complicated or too narrow.
Whether you’re a beginner or an experienced investor, your investment strategy should be based on factors such as your time horizon, risk tolerance, and personal financial situation.
8. Understand the investment costs
Nearly all investments, including stocks, bonds, mutual funds, brokerage accounts and 401(k) retirement plans, come with fees and commissions that investors need to understand.
“Some employers will subsidize some of the costs of your 401(k) or require you to pay the full amount,” says Cheryl Krueger, CFP, a financial advisor at CGN Advisors in Inverness, Ill. “It helps to let[your boss]know what you’re noticing.”
If the costs of your employer’s retirement plan are too high, consider investing only enough to receive your employer’s contributions and making additional investments outside of the plan.
9. Follow an investment plan
A stock market drop can be a good buying opportunity for stable investors looking to add assets to their portfolio.
Review your investment strategy once or twice a year and don’t get swayed by news headlines when allocating your funds.
“The goal should be that it’s an ongoing process, not one that’s stopped and restarted depending on the news of the day,” says Rogosinski of Women+Wealth Solutions.
Having a long-term investment strategy and a diversified portfolio will help you weather market fluctuations without making decisions based on emotions.
10. Don’t be afraid to ask for help
Some investors may not know where to start when it comes to things like selecting stocks and ensuring a balanced portfolio. Don’t hesitate to seek advice from a financial advisor. You can choose a traditional financial advisor, who typically charge a fee of about 1 percent of your assets. You can also turn to a robo-advisor, who usually has lower fees and helps you build a portfolio based on algorithms.
–Freelance writer TJ Porter Contributed to updating this article. Freelance writer Marci Geffner contributed to an earlier version of this article.
