How to save money effectively: 6 smart savings strategies (2024)

Affiliate links for the products on this page are from partners that compensate us and terms apply to offers listed (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate banking products to write unbiased product reviews.

• To save money, evaluate your expenses and see if there are areas where you can limit spending.
• Consider whether your money is in the right place and review interest-earning bank account options.
• If you're saving for a specific purpose, set practical guidelines for goals.

Whether you're beginning to put away money for an emergency fund or ready to save for a down payment on a house, reviewing your savings habits can be integral to reaching your financial goals.

There are several key steps and strategies to use when saving. You need to understand your finances, create a budgeting plan, start reducing spending, build an emergency fund, and practice other smart financial habits. You should also understand what tools are available to you, from investing, budgeting, and banking tools to side hustles and other ways of making additional money.

Here are six steps and strategies to saving money.

1. Understanding your finances

Assessing your income and expenses

To start saving money, you first have to look at where your money is going.

"Oftentimes, people find it difficult to save because they try to do that after they take care of a lot of spending — after they pay their mortgage, rent, car payment, their groceries, etc. They find that they may have nothing left. I always suggest tracking your spending because that helps you identify money that can be saved," says Patrina Dixon, CFEI and founder of It'$ My Money.

Evaluate your spending to see if there are any specific categories where you can make some monthly adjustments.

Setting realistic financial goals

Maybe you want to save for particular savings goals, like a vacation or new car.

To help make your goal more tangible, Scott Stanley, CFP and founder of Pharos Wealth, says you can estimate expenses for your goal and set a timeframe. Then, you can review your budget and see how much you can save each month to make the goal more tangible.

If you realize it's becoming challenging to save for your goal, consider resetting your expectations by extending your timeline or selecting something with a more practical cost.

The role of budgeting in saving money

Budgeting can help you identify how much money you have to spend, as well as what expenses you should spend that money on. Some expenses will be necessary to cover every month, like rent or utility bills; these are considered essential expenses.

Nonessential expenses are things you don't necessarily need to pay every month and are dependent on your wants, like entertainment and eating out. Your budget will help you determine what nonessential expenses you can afford, and which ones you need to cut back on or get rid of entirely.

2. Effective budgeting strategies

Creating a monthly budget

There are a few common budgeting tips you can use to structure your spending when you're learning how to budget.

One example is the 50/30/20 budget rule. In this budgeting strategy, you spend 50% of your income on your necessities, like housing, transportation, and utilities, 30% on nonessentials, and 20% on savings, investments, and debt repayments. This is a flexible rule you can tweak to fit your situation, but it might not work for every circumstance, especially if you live in an area with high cost of living.

Another common budgeting strategy is the 70/20/10 budget rule. With this strategy, you'll spend 70% of your income on essential and nonessential expenses, 20% on savings and investments, and 10% on debt payments or donations. Like the 50/30/20 rule, this is a flexible rule that doesn't require you to keep careful track of every expense. If you want to focus on debt repayment, or if donating part of your income each paycheck is important to you, this might be a good strategy for you.

If you've kept up with a consistent budget, check in on your progress. If something doesn't go to plan, you can always modify it. You'll also want to make adjustments if you recently received a raise or bonus.

Identifying areas to cut costs

Once you've decided on a budgeting strategy, you can identify places you might be overspending.

Reducing non-essential expenses doesn't necessarily mean you have to eliminate things that bring you joy. Instead, Dixon recommends reducing how frequently you're making that particular purchase.

For example, let's say you are a gourmet coffee aficionado. If you buy gourmet coffee from a cafe every day, you could alternatively go once or twice a week and contribute more to your savings.

Budgeting tools and apps

There are lots of budgeting tools, such as money saving apps and personal finance software programs, that can help you build your budget. If you don't want to use online apps or software, you can always use a notebook to track your expenses.

Using a budgeting app can help you keep track of your expenses without having to do it all manually. Budgeting apps can also help show you areas where you might be overspending. Depending on what app you use, you might also have access to other features, like monthly bill reminders, savings goals planning, and more.

If you would like to track your progress toward a specific financial goal, you might like a savings account with budgeting tools. Some high-yield savings accounts let you label and track progress for goals. Another option is to open a secondary savings account to track your progress.

3. Reducing everyday expenses

Saving on groceries

If you're looking for ways to curb your spending on groceries, Dixon suggests planning out shopping trips beforehand to make you get everything you need all at once. This could also be helpful with saving gas if you would normally make frequent grocery trips or don't live near grocery stores.

Cutting utility costs

There are several ways to cut utility costs, although some of them require upfront expenses.

One way to cut utility costs is to bump your heat down a few degrees in the winter, or raise your thermostat by a few degrees in the summer. You can also consider turning your heater or air conditioner off or down at night, if the temperatures in your area permit it.

If you're interested in saving money long-term and don't mind spending some money, consider investing in energy-efficient appliances or solar panels.

Lowering transportation expenses

If your area offers public transit, using that might be less expensive than paying for the gas you would use to get somewhere — especially if your city's public transit system is robust enough to get rid of your car entirely. If your city is bikeable, replacing your car with a bike might provide similar savings.

While this option definitely isn't possible for everyone, being able to avoid car payments, expensive maintenance fees, and gas costs can save you a lot over time. Using public transit or biking might also help you avoid using ridesharing apps, which can get very expensive over time.

4. Smart financial habits

The benefits of an emergency fund

Having an emergency fund is vital for financial security. If you lose your job or have a surprise medical bill, an emergency fund can keep you from going into debt or having to dip into money you were saving for something else. It can also help ease money-related stress, since you know you have funds to fall back on.

You should keep roughly three to six months' worth of expenses in your emergency fund. You might want to keep more than that saved to budget for healthcare costs or other emergencies if you're more likely to run into them.

Putting your emergency fund in a high-yield savings account can also help you earn extra money off of your emergency fund.

Prioritizing high-interest debt repayment

Debt, especially debt with a high interest rate like credit card debt, can build up over time. If you're not paying off your debt fast, you could end up just paying the debt's interest without touching the principal, or the original money you borrowed. If this happens, you won't make any progress towards being debt-free. Make sure to budget enough money for debt repayment to avoid this, and try to pay off debts as fast as you can to avoid paying too much in interest.

If you have several debts, consider prioritizing repaying the ones with the highest interest first. This is a debt repayment strategy called the "avalanche method," and it can help you save money in the long run. You could also use the "snowball method," where you pay off your smallest debts first. Analyze your debts to decide whether the avalanche method or the snowball method is the better choice for you.

Investing in your future

It's important to start saving for retirement as soon as possible, and investing can be a great way to do that. Contributing regularly to something like a Roth IRA can ensure that you have money to depend on later in life. Not only will you have the money you put into the Roth IRA, but you'll also have whatever money you made off of investing, too.

You can also use investing to pay for long-term financial goals, like buying a house. Just be aware that investing comes with risk, and it's possible that you'll lose money.

Compare Today's Savings Rates

5. Making extra money

Side hustles

Finding ways to make money outside of your job can help make sure you always have some money coming in. There are several ways to find fast cash, including money-making apps, freelancing, or using gig economy apps.

While you're unlikely to earn lots of money from them, money-making apps can help you earn some money, and the tasks they offer don't usually require much from you except for time.

Freelancing is more likely to provide a strong extra income stream, but can be inconsistent and might require more investment from you. There are several online freelancing platforms you can use to get started, like Fivver and Upwork. Similarly, gig economy apps like Uber or TaskRabbit could provide an extra income stream, but also frequently require you to provide your own equipment.

Selling unused items

You can use apps like Depop, Poshmark, or Facebook Marketplace to sell things you already have but don't need. Keep in mind that apps like this sometimes charge a fee to use them.

If selling your stuff online doesn't appeal to you, you could throw a garage sale to get rid of things you don't need anymore.

High-yield savings accounts

High-yield savings accounts are similar to regular savings accounts that you'd find at brick-and-mortar banks, but they offer more competitive interest rates. Putting your money in a high-yield savings account is a great way to make money off of your savings without risk.

The best savings account option for you will likely depend on when you'll need to access your money. Savings accounts typically have a cap on how many times you can withdraw your cash per month, although some don't. While it can be inconvenient to not have access to your money at any time, this can also be a perk if you don't want to be tempted to dip into your savings.

For money you need access to more regularly, a checking account is a better choice. You probably won't get as good an interest rate — most checking accounts don't earn interest at all — but you'll have much easier access to your money.

"The majority of your direct deposits may go into there so that you can pay your car payment, rent, mortgage, whatever the various bills that you need to pay," explains Dixon.

Certificates of deposit

Like high-yield savings accounts, CDs are all interest-earning bank accounts that can help grow your money.

CDs are different from high-yield savings accounts in two key ways. First, you generally can't withdraw money from your CD after you put it in. CDs last for a specific length of time, referred to as its "term length," and you generally only get access to your money again at the end of that term length. Second, while savings accounts have a variable interest rate that can change at any time, CD rates are generally fixed, and will stay the same for however long your term length is.

Certificates of deposit are great for saving for specific long-term goals, especially if you know how long you want to save for. They're also good for ensuring you keep a good interest rate for a long time. However, if interest rates rise after you open a CD, you might be stuck with a worse interest rate than you would have with a savings account.

Automated savings plans

Automating your savings can be a great way to ensure you're always making progress on your savings goals. Stanley recommends setting up an automatic transfer from your checking account to a high-yield savings account after each paycheck. That way, you won't forget and accidentally overspend money you were planning on saving.

By assessing your income and expenses, making and sticking to budget, and making use of different financial tools, you'll be able to save money and start building towards your financial goals. If you follow these tips, you can start saving for the future, even if you don't think you have much money to set aside.

Saving money tips FAQs