There is no one way to save money. However, successful savings does consist of both big and small actions. You can think of this as breaking the savings effort down into strategy and tactics.
Savings strategy represents your big-picture planning. It gives your effort some direction, and over time helps you see whether or not you are on track. Savings tactics consist of day-to-day, month-to-month practical things you can do to save money.
Both strategy and tactics are essential to saving money. Without strategy, you'd have no way of knowing whether the sum of your tactics was enough to meet your goals. On the other hand, without specific tactics, you'd have a long-range plan but no way to make it happen.
The following are some details on savings strategies and tactics.
Here are some elements of a comprehensive saving strategy:
- Set a long-term goal: Know what you are trying to accomplish, and how much money it will take. This goal can be buying a home, sending your kids to college, affording retirement, etc. Setting a long-term goal will not only give you a target, but a positive goal can be an important motivation to save
- Set short-term goals: Once you identify and quantify your long-term goal, break it up into a series of yearly steps. This gives you something immediate to shoot for, and a steady stream of feedback as to whether or not you are on track
- Figure out your savings rate: Take a good look at how much you are earning and how much you are spending. Whatever is left over represents your savings; divide that by your earnings and you'll have your savings rate. This can be the baseline for your future savings efforts--something to build on
- Work on building your savings rate: If you are like most people, your current savings rate probably isn't enough to meet your long-term goals. Therefore, one component of your strategy should be to build your savings rate over time. This will help you avoid having your expenses rise as fast as your income as you move ahead in your career
- Structure your savings and investments: Figure out how to put your savings to good use. You should have a savings account for emergencies and short term needs, certificates of deposit (CDs), and an account for big expenses that you anticipate within the next few years. You should also have longer-term investments for growth. Make sure you have an investment allocation plan, so you don't simply chase the hot market
The following are some tactics that will help you implement those plans:
- Make a budget: Identify what you are spending now, and how much you can afford to spend to get your savings rate up to your target. Once you've done this, you can start to work on a budget that will get your spending into line
- Target unnecessary expenses: These are things you spend money on that you flat-out don't need. It may be the extra tier of cable television that you rarely watch, the extra meals at restaurants that aren't anything special, or the wardrobe items that you never really wear. Just looking at your expenditures in detail can make unnecessary expenses obvious
- Target excessive expenses: These are things you need, but that you could get more cheaply. Have you shopped for insurance lately? Refinanced your mortgage? Could your next car be a little better on gas mileage? Just because you can't eliminate an expense doesn't mean you shouldn't work on reducing it
- Come up with a spending discipline: Once you have a budget, you need a discipline to make sure you stick to it. Some people give themselves a weekly allowance in cash, and don't spend beyond that. Others take their credit cards out of their wallets when they have reached their spending cap for the month. Find a way to make sure that impulses don't undermine your best intentions
- Find the best savings rates and investment options: As you start putting those savings to work in savings accounts, CDs, and investments, make sure you put them to good use. Shop for the best savings account interest rates and CD rates. Make sure any investment fees are competitive--the lowest fee investment vehicles are not always the best, but excessive fees really stack the odds against you
The way to save money is to create a long-term plan and then support it with a series of day-to-day actions. In this way, your strategy and your tactics will come together to help you meet your goals.