This is an original article written for Let's Thrive Now by Libby Magliolo. Libby is an experienced personal finance blogger, with a particular passion for teaching high school and college students the essentials for living a financially healthy life. You can get more advice from her by following her on Instagram.
We all hear that we're supposed to save, budget and invest, but it's often overwhelming to think about where to even start. It can seem like an intimidating process, and it may feel like we just don’t have the time to think about it. The silver lining is that no matter where you're starting from, there are some small, easy steps that will set you on the path of saving money and letting that money work hard for you over time.
1. Understanding Where Your Money is Going
The first step is to understand where your money is going right now. To do this, it's helpful to track every single dollar that you spend for a month (or even start with a week!). From the big expenses (mortgage/rent) to the much smaller expenses (a quick fast food lunch), it helps to see where every dollar is being spent. A notebook and a pen are a perfect way to track this, but there are also great (free!) tools out there, like Mint and Personal Capital, that help automatically track all your spending.
It's important to remember that in order to be able to start saving towards your goals, you must be earning more than you're spending every month. This means that carrying a large credit card balance, or buying things you can't afford will prevent you from being able to save for long-term goals. Tracking your spending lets you know if there is money left over after all expenses are paid, and lets you see how much money you may be able to put into savings.
2. Start to Budget and Save
After you track your expenses for a month or two, you'll have a sense of your baseline spending and get an idea of if there's money that can be put towards savings. If there's not as much left over as you'd like, this is a great opportunity to see where you can make some adjustments in spending habits. Eating out for lunch every day may seem like a small cost, but a $10 lunch every weekday adds up to $2400 per year! Packing a lunch instead of eating out can be an easy way to cut spending.
Look through your monthly spending that you've tracked to see if there are other areas like this where you can make small changes that add up to big savings. Eating out less and cooking more at home is a great place to start - it helps cut down on food costs and is generally a healthier option, especially because it gives you full control over what's going into your meals.
3. Set Your Savings Goals
The next step is figuring out what your savings goals are. When you know what you're working towards, and what you're saving for, your day-to-day budgeting feels more meaningful and keeps you excited as you work towards a goal. It could be saving for a down payment for a house, or paying down debts, or saving for a big vacation, or starting to save for retirement. What's important is that your saving has a goal - when you're working towards something, saving and budgeting becomes that much easier.
4. Let Your Savings Work For You
Deciding to put aside money towards savings is one of the biggest steps you can make towards achieving your goals. Putting money aside, especially in an account that earns interest will let your savings grow. This is where time is the greatest asset in your savings process. When you put aside money into a savings or investment account, that money will earn interest or returns. The process of "compounding" means that your interest is then earning interest.
If you keep a $20 bill in your wallet, it'll still be worth the same $20 in a year. But if you put that $20 into an account that generates interest, it will continue to grow over time because that $20 will earn interest, your bank balance will grow, and then that new larger balance will earn even more interest over time.
What to Do Next
Just remember that wherever you're starting from, taking these steps will help you understand what you're spending now, and where you may be able to adjust spending in order to increase savings. Tracking your expenses and deciding what you're working towards will help set you on the path towards setting aside money towards a goal, and then letting that money compound and start working for you.