You know you need to save money, but it can be hard if you’re just trying to make ends meet on a small income. After all, you have bills to pay today, so it’s hard to make saving for tomorrow a priority.
Even higher-income people can find themselves living paycheck to paycheck without much room in their budget to set aside cash. “Most people don’t start saving for retirement or short-term goals because they think they don’t have enough money,” said Brandon Hayes, vice president of financial planning firm oXYGen Financial. But that couldn’t be further from the truth, he said.
Despite what you might think, it is possible to save even when you’re strapped for cash. Even a small amount is better than nothing, Hayes said. Here’s how to get started.
Figure Out Where Your Money Is Going
You might have more room in your budget to set aside money for savings than you think. But you won’t know until you track your spending for at least one month.
“Having this knowledge is crucial to finding ways to stretch your current income,” said Dominique J. Henderson, Sr., owner of financial planning firm DJH Capital Management. “You have to understand where every dollar is going.”
Review your bank statement to figure out how much your necessary expenses — rent or mortgage, utilities, insurance, transportation and food — are costing you. Account for credit cards, student loans and other debt payments. Then, add up how much you’re spending on things you can live without, such as cable TV or Netflix, restaurant meals, magazine subscriptions and nights out.
Knowing how much of your paycheck is going toward needs and wants will help you pinpoint how much you can afford to save each month.
Pay Yourself First
You should think of saving as one of your fixed expenses that you pay at the beginning of the month rather than waiting until the end of the month to see how much you have left over to set aside. Pay yourself first, then learn to live on what’s left.
One of the best ways to pay yourself first is to automate contributions to savings so you don’t even have to think about setting the money aside. If you opted out of your workplace retirement account because you didn’t want to sacrifice any of your small paycheck, you need to opt back in and have contributions automatically withdrawn from your paycheck each month.
You also need to be saving for emergencies so you don’t have to rely on credit cards or even retirement savings to cover unexpected costs. To build an emergency fund, use the same approach as with retirement savings by setting up automatic monthly transfers from your checking account to a savings account so the money comes out before you have a chance to spend it.
“A good rule of thumb is to place 10 percent of each paycheck into savings,” Hayes said.
But, don’t get discouraged if you can’t set aside that much now. Even a small monthly contribution can add up to $1 million for retirement if you start saving at a young age because your money will have more time to grow.
Get Free Money for Your Retirement Account
If you can’t set aside 10 percent of your pay each month, contribute enough to your workplace retirement plan to get the full matching contribution from your employer — if it offers one — because this is practically free money. The most common type of match is 50 cents for every $1 contributed by an employee up to a certain percentage of pay — typically 6 percent, reported 401kHelpCenter.com.
However, 25 percent of employees don’t contribute enough to get the full match from their employer, leaving an estimated $1,366 of free money on the table each year, according to research by Financial Engines, an investment advice company.
Keep More of Your Paycheck
A tax refund can be welcome windfall when you’re living paycheck to paycheck. But a refund means you’re letting the IRS hang onto too much of your paycheck throughout the year. “Your tax refund represents an interest-free loan to the government,” Henderson said.
You can keep more of your money each month — and use it to boost savings — by adjusting your tax withholding. Ask your human resources department at work for a new W-4 to claim more allowances, which will lower the amount of taxes withheld from your paycheck. You can use the IRS Withholding Calculator to figure out how many allowances to claim so you don’t have too much or too little withheld from your paycheck.
If you received the average refund in 2016 of $2,732, adjusting your withholding could put $227 back into your paycheck each month. If you invested that amount each month at a 7 percent interest rate starting at age 25, you’d have nearly $600,000 by age 65.
Reduce Nonessential Expenses
If you discover you’re spending heavily on things you don’t need, those nonessential expenses are the first thing you should cut to make sure your paycheck can cover necessary expenses and savings contributions.
“It can really help to visualize how much you can save by cutting out little things like coffee and a bagel every morning,” said Katharine Perry, associate financial consultant at Fort Pitt Capital Group.
Based on figures from Fort Pitt Capital, if you gave up buying a coffee and bagel twice a week, you could save an estimated $40 per month. If you were to invest that amount each month instead with a 7 percent annual return, you would have $32,402.87 after 25 years.
Raise Your Insurance Deductibles
Another way to find more room in your budget to boost savings is to cut insurance costs.
“We all need insurance, so I’m not advocating cancelling any policies,” Henderson said. “However, often the deductibles on insurance policies can be raised, which in turn reduces the premium you pay.”
For example, by raising your auto insurance deductible, you can lower your premium by 15 percent to 40 percent, according to the Insurance Information Institute. Raising your homeowners insurance deductible from $500 to $1,000 could shave 25 percent off your premium.
You also can lower your health insurance premium by opting for a high-deductible plan. With a high-deductible plan, you also get the benefit of being able to set aside money pre-tax through payroll deductions to a health savings account (HSA), said Jody Dietel, chief compliance officer at WageWorks, which administers employee benefits programs. Money in an HSA can be used to cover out-of-pocket healthcare costs.
Lower Your Bills
In addition to insurance premiums, there likely are other monthly bills you can cut so you’ll have more cash to stash in savings. Financial coach Rocky Lalvani recommends pinpointing expenses such as Netflix, cable TV, phone service or a gym membership fee, and asking yourself whether you’re using each of these services. “If not, get rid of it,” he said.
Then, look for ways to lower the cost of services you do rely on and other bills you must pay. For example, if you’re a responsible credit card holder, call your card issuer to see if it will lower your interest rate. You might be able to reduce a monthly federal student loan payment by qualifying for an income-based repayment plan. Opt for a lower data plan to cut the cost of wireless service, or consider these ways to cut your monthly bills.
Let Technology Help You Save
If you don’t have the discipline to save on your own, there are several apps that can help.
For example, with the free Qapital app, you can set a savings goal and create rules that trigger an automatic deposit into your Qapital account — held by Wells Fargo. The app can round a purchase up to the nearest dollar and deposit the difference. Qaptial claims the average user saves $44 a month by rounding up. The account doesn’t earn interest, but you can withdraw your money at any time and transfer it to an interest-bearing account, such as a no-fee online savings account.
The free Digit app takes automation a step further by linking to your checking account and analyzing your income and spending habits to figure out how much you can set aside in savings. It then automatically puts that money into savings for you.