Saving money is not always an easy or fun thing to do on a consistent schedule. Bills can add up. Unforeseen expenses can take you by surprise. Luckily there are experts out there who can give you a hand when it comes to saving money and getting out of debt.
Chris Arnold, an NPR correspondent, covers personal finance and consumer protection, and he hosts NPR’s “Life Kit” podcast episodes about saving money. Arnold was on Connecticut Public Radio’s Where We Live with Lucy Nalpathanchil, and he spoke about the various saving strategies that you can adopt or adapt to create your own savings plan and shrink your debt. Here are eight of his best tips distilled to help you start saving money now.
You can listen to Where We Live’s entire episode on taking charge of your personal finances, which originally aired on March 5, 2019.
INTERVIEW HIGHLIGHTS
Some People Who Think They Can’t Save Could Be Saving Already
We tend to think we can't save as much money as we actually can is what the research shows. There are tons of people who don't save anything in a 401K plan or any kind of retirement plan. We have this retirement savings crisis in America really and that's not overdramatizing, but what [the UK's new law on automatic retirement enrollment for all workers] found is if a company automatically enrolls its workers into a retirement plan like a 401K or a 403B, 80-90 percent of the people you have across the income scale still stick with it. The people, many of whom might have said, “Oh no, no I couldn't possibly save anything.” They’re [already] saving money.
Take That Employer Match
If your employer is giving a 100 percent match on the money that you invest, I mean that's just free money. You just got to find a way to take advantage of that. It's like, oh I'm going to put one hundred dollars or a thousand dollars into this account and I'm immediately going to get 100 percent return. I get to get a thousand dollars from my employer--free money--no matter what else is going on. You just got to find a way to make that work right.
Make Your Savings Automatic
If you can do one thing to get better at saving money--it's super simple--make it automatic. If your employer offers a 401K, for example, and you can sign up for that and then every paycheck, automatically, money is coming out and getting sent to an investment account that hopefully, you set up the right way.
Over time you don't need to see that money. It is invisible to you, you don't have to remember, “Oh! It's Tuesday. That's the day that I've gotta remember to write a check to myself for some money to save.” We are just bad at that. It's Tuesday you're going to think about the dishes, getting the kids to school, or get your homework done, or whatever the case may be. You are not thinking about squirreling away money. Make it automatic so you don't have to do anything. And this saving just happens by itself.
The “50-30-20” Method
The 50-30-20 rule means 50 percent of your income should be going to just your fixed costs like your car payment or rent, or your mortgage.
The 30 number is kind of discretionary. [For example], I want to go out to eat, or I want to pay for my kid's sports, or I want to go on vacation. And then 20 percent, and this sounds like a big number, but 20 percent should be for saving. If you'veaccumulated some debt, some of that 20 percent might be to pay off the debt. People really need to be saving these days like 10-12 percent of their income for retirement someday.
That’s the general architecture of it. Individual circumstances might be different if you live in Manhattan--your housing costs are going to go higher. If you know you're paying off massive amounts of student loans you might want to try to save more. But that's sort of a baseline to start at and go from there.
It should be 20 percent of your money going into savings and that, of course, would be very hard to start tomorrow if you're not there now. So an effective strategy is you start with like 2-3 percent and then each year you bump it up by another 2 or 3 percent. If over the course of five years you're bumping up 2 or 3 percent, pretty quickly you can get to a place where you're saving a lot of money. And the goal is 10-12 percent should be for your retirement account. You have to sort of meet yourself where you're at.
The “Avalanche” Method
If you've got credit card debt that you're being charged 22 percent interest or something outrageous, you got to be going after that. Student loans they're at 7 percent. As far as like going hyper-aggressive to get rid of that [student] debt you know that can probably wait till you get rid of the credit card debt and you just follow the numbers to go after what makes sense. Then you can move down the list going after the stuff that's hurting you the most. You start with the highest interest rate and go down. That's called the avalanche method.
The “Snowball” Method
You start with the smallest debt first regardless of the interest rate and say, OK I owe four bucks on this credit card I'm just going to pay it off. Behavior research shows that getting little wins like that motivates us and makes us feel more powerful and want to go after the next debt. Ultimately budgeting is going to be a part of this. It doesn't have to be super complicated.
The "Envelope" Method
Another thing you could do is put money in envelopes and stop using credit cards. Don't cancel the credit card accounts because that can hurt your credit score. It’s way too easy to spend money on plastic. So if you decide, I'm just going to spend 100 bucks on groceries this week or whatever it is, you put the cash in the envelope, and when the money's gone from there that's when you stop spending.
If You’re Young, Start Saving Now
So what that means is if you are in your 20s, you got your first job, you got that employer match, you have a roommate, living cheap -- by 35, you [could have] $100,000 saved up which is totally doable. Then by the time you're 45, it's going to $200,000. By 75-years-old, you get 1.6 million dollars. This is why people say you have to start saving when you're young. You might not have a lot of money but you've got a lot of time and it's incredibly powerful. You really want to harness that.
Does Arnold Follow His Own Advice?
I've always been really good at the big stuff in my mind like saving for retirement and investing it in a smart way. But it's the more everyday budgeting stuff I haven't been as good at. I'm actually learning as I go into this. I think it's fascinating and people feel better about themselves when they figure this out. Check it out and hopefully, you get to a better place.
Interview highlights have been edited for length and clarity.
