The first and most important step is to get a clear picture of where your money is coming from and where it goes. The "coming from" part is pretty easy, especially if your income is mostly a salary from a single job. The "where it goes" part can be devilishly difficult—but rewarding.
"There's a difference between saying, ‘We're tight this month but we know exactly why,' and saying, ‘I have no idea where the money went,'?" says Me'Shae Brooks-Rolling, a financial literacy instructor at Syracuse University and author of "How to Save Money and Organize Your Finances: Tales of an Urban Consumer (AuthorHouse, 2006). "It's more satisfying to know where it's going."
So start by creating a "money plan"—a complete record of your income and expenses on a month-by-month basis. If you're a computer person, you'll find it easiest to do that using a spreadsheet, a desktop personal-finance program such as Quicken or an online budget calculator. Most of the programs and sites can automatically gather spending data from the Web sites of your bank and credit-card companies. They also let you mark each item with a tag that categorizes its purpose, such as "clothing," "dining out," or "auto repairs."
If you're more comfortable working on paper, simply collect and organize your bank and credit-card statements, and keep a file of receipts with dividers for each of the above categories and any others that might be applicable.
Don't overlook big, one-time payments such as taxes or insurance premiums. You can allocate them proportionately across all 12 months to give a complete picture of your monthly costs. But also keep track of small cash purchases by jotting them down in your smart phone or in a notebook as they occur. That will help plug that sneaky hole that most of us seem to have in our pockets when it comes to carrying cash. Soon you'll see where your money is going—and that's the first step in stopping the leaks.
Most people save best when they have a specific purpose for the money, such as buying a home or new car, sending a child to college, or retiring well. We cover many of those separately—see college advice and retirement advice. In this report, we're going to concentrate on saving, pure and simple, for whatever goal you have in mind.
Let's start with the first goal, which—especially in these times—should be to build up a cushion of cash to protect you and your family in case of emergencies such as job loss or medical bills.
How much of a safety net do you need? Tim Maurer, a financial planner in Hunt Valley, Md., says it depends on the source of your income. A dual-income family working in stable industries should aim for at least three months of cash reserves. A six-month cushion is preferred for single earners with stable income supporting a family or dual earners who rely on non-salary income such as commissions or bonuses. If you're self-employed, a one-year emergency fund would be even better. Obviously most of us fall well short of those goals, as the MetLife survey mentioned shows. But at least the goals drive home the importance of effective savings.
Setting such goals can seem daunting. But getting there comes down to some old-fashioned rules: Spend less than you earn, pay down your debts, and keep the rest in a safe place. And here is perhaps an upside to our prevailing economic anxiety: The climate is perfect to do just that. "Don't worry at first about numbers that seem out of reach," Maurer says. "Step One for everyone should be saving for at least one month ahead. The idea is to get past living from paycheck to paycheck."
Next, determine where to put the money you save. Safest places for your cash offers some specific suggestions. In general, it's a good idea to establish a separate account—or accounts, if you need them to keep all of your money FDIC-insured—for each savings goal. That way you'll know at a glance how much you have in your emergency fund, your new-home fund, or other funds. Money for retirement should usually go into a tax-advantaged retirement account, as discussed in our retirement section. If you don't mind accepting some risk, you can also consider investing a portion of your long-term savings—money you won't need for many years—into the stock or bond markets. Here, we concentrate entirely on cash-like investments, where your money is as safe as possible and is shielded, to the extent it can be, from market ups and downs.
The spirit is willing but the flesh is weak, as the saying goes, and that is definitely true of savings. With the responsible part of our brains, we set up savings programs, determine goals, and take the kinds of steps recommended in this magazine. But as time goes by, almost everybody faces temptations—from that new gadget or great-looking pair of shoes to, more seriously, the temptation to raid long-term savings for short-term needs.
Maybe there's no foolproof strategy for resisting temptation, but at least you can make sure that you are automatically putting money aside. The easiest way is through programs that take money out of your paycheck before you even see it. Join your company's 401(k) or 403(b) plan, if it has one, and set aside at least as much money as the company will match and more if you can handle it.
You can also set up regular deductions from your checking account to go into your emergency fund or other savings account. Call your bank or the institution where your savings account is located for more information. Even if you are saving at some institution other than your bank (through a money-market mutual fund, for example), you can generally link that account to the institution where your emergency fund is held and have it withdraw a certain amount each week.
Financial planners generally recommend that you save approximately 10 percent of each paycheck. Even if you can set aside only a few dollars a week, just having the automatic deduction in place will help. Soon you'll adjust to not having that money, and you might find it easier to increase the amount gradually without causing real pain.
To help make the above strategies more palatable, also look for savings in your daily spending and activities. Ken Robinson, a financial planner in Cleveland, suggests putting aside $5 every time you withdraw money from the ATM. You can stash the cash in an envelope somewhere out of sight, so you won't be tempted to spend it but you can still find it in case of need. Advisers also recommend setting aside envelopes of cash for groceries or entertainment to force yourself to limit your spending.
You can probably also find places to save in everyday spending. For instance, if you're spending $7 a day on lunch, brown-bagging it four days a week will save you approximately $1,000 a year.
Scour any recurring bills for savings too. Your telephone bill, for example, probably includes a laundry list of charges for services—some of which might have sounded like a good idea when you signed up for the package but which might no longer be needed. Canceling your landline phone if you can manage with just a cell phone can save even more. Switching to a prepaid cell phone can also help control spending. Prepaid services such as Boost, a division of Sprint, offer unlimited phone, text, and Web use for $50. A similar contract-based plan at Sprint costs $100 a month.
Last, if you're having trouble sticking to your plan, don't go it alone. Jill Sturm, an assets service director at EARN, a San Francisco nonprofit that helps families with saving strategies, recommends finding a "saving buddy." That's a friend or family member who is as committed as you are to saving more, with whom you can compare notes and share progress reports.
Remember, as our new money rules state, saving successfully is a lifestyle, not a response to a crisis. The greatest benefit won't be simply to get through this downturn but to develop habits that will guide you day by day. "This is a habit of accumulation," says John Henry McDonald, a financial adviser in Austin, Texas. "It takes some people a couple of years to build that habit, but everyone can do it."