We all know we need to be saving for the future, but I’m often asked, “How do I get started?” This task can feel daunting or perhaps you’ve tried in the past and failed. Here are three easy steps that will help you start saving and stick with it.
Step 1: Start Small
Choose an amount of money that doesn't hurt too much and put that money aside in a separate account as soon as you earn the money. Our brains are capable of adjusting our budget for us, based on how much is available, so if that $50 is no longer available, we mentally don't account for it in our buying decisions, and it stays safe in the savings account. Of course it is fairly easy to make it available, and if you find that you are dipping into that savings account often then you've realized how easy it is to get to and need to put the money somewhere slightly harder to access, like a brokerage account or an online savings account.
Step 2: Set up Automatic Transfers
The next "trick" to saving is to set it up to happen automatically so it isn't a choice you have to make over and over again. It's easy to rationalize why you can't save this month, and each time you have to make the conscious choice to save or not to save is simply another chance to choose poorly. But if you have to take the proactive step of cancelling an automatic transfer rather than the passive step of not transferring money, chances are you'll find a way to make it through the month without spending that money.
Step 3: Increase the Amount
Now that you’re saving regularly and automatically, you need to start increasing your savings. If you are early in your career then an easy way to do this is to save 50% of each raise you receive. This will build up nicely to a good overall savings rate over time.
If you're in your mid- to late-career you'll need to adjust to the lifestyle of your starting savings, then when you've adjusted you can increase the savings and then adjust again. Your ultimate goal should be saving at least 15% of your income, though you may need to save more or less depending on your situation.
Where to Start Saving
One final thing to consider is where you are saving money. A great place to start saving is your company's 401(k) if there's one available to you. The money is taken out of your paycheck before you have access to it, and the money is difficult to withdraw so it meets the first two steps I laid out above. Additionally, many 401(k)s have a company match, in which your employer deposits an amount for you based on how much you deposit. Once you're getting your full company match then it's okay to look at where else you should be saving.
If possible you should also start by saving up a small emergency fund of at least $1,000, so that when something goes wrong you have money available to pay for it. If you aren't able to do both, start with the emergency fund so you aren't forced to go into debt in case of emergency. Once you are saving enough in your 401(k) to get the full company match, start adding additional savings to your emergency fund until there is 3 - 6 months of expenses saved.