If you’re reading BiggerPockets, you probably have some interest in real estate investing, building a business, or even retiring early. These are big, exciting goals!
Unfortunately, if you are anything like the average American, you may not be financially equipped to meet them. According to the Federal Reserve Bank of St. Louis, the average personal savings rate in the U.S. has hovered around 6 to 8 percent for most of the past decade. 
This article is intended to help you buck that trend and save aggressively. We’ll cover the basics of saving, and include some tips along the way. Read on for a complete (or as complete as possible in 3,000 words) guide to saving money!
How to Save Money: 5 Steps to Living Your Financial Best Life
1. Know Your Money
Imagine stepping onto a sports field with no idea what game you’re playing or who your teammates are. How in the world do you even know where to start, let alone how to score or win the game? This may be how you feel about saving if you don’t know how your money flows. So, the first step to saving money is to simply know your money.
Track your income and expenses (with no judgement)
It seems logical to track what you spend, but that doesn’t mean much without knowing what you make. Say you make $50,000 annually. What does that translate to in monthly income reaching your bank account? Do you have a single source of income, income from each spouse, or even more streams of income? Most of us start with just one or two sources of income, but it’s important to know exactly what those are.
Knowing you spend $3,000 per month could be good news if you’re making $4,000 per month… or bad news if you’re making $2,000 per month. Once you’ve outlined exactly what’s coming in each month, you can put your spending into context.
Unless you have a highly variable, commission-based income, chances are your monthly expenses will vary much more than your monthly income. Categorizing your expenses for a full year is a great way to understand how your expenses ebb and flow through the holidays, travel seasons, etc.
It can also be very daunting. If you’re not up for going back a full year, start with the latest three to four months. This will give you a decent idea of your monthly spending and provide a starting point for tracking going forward, so you can eventually build that full-year view.
While you’re in tracking mode, try to stay judgment-free. You don’t want to give up on saving before you even begin because you’re discouraged by what you see. As the saying goes, you either win or you learn. If your past spending habits don’t feel like a win, just focus on learning from them.
We’ll get to the wins soon enough!
Create an initial budget
You know what you make and what you spend. Now it’s time to create a budget. You can start your budget based on how you currently spend, but make sure you ask yourself what you like and dislike about how you’ve been spending. This will help you think about how to adjust your allocations to each budget item as you look for ways to cut spending and increase savings.
There are plenty of ways to track spending and create a budget. Probably the most common methods are Excel spreadsheets or online platforms, like Mint.com. Your budget doesn’t have to be an exhaustive list of 40 to 50 categories. Start with the major three spending categories (housing, transportation, and food), and fill in from there.
Personal finance is personal, so rather than use some online list of budget categories, make the budget your own! If you’re feeling overwhelmed by the number of possible categories, look at your past few months of spending and see which areas account for at least 5 to 10 percent of your average monthly spending.
If you realize you spend an average of 8 percent per month on concert tickets and radio subscriptions, music may be a passion of yours that is worth its own category in your budget! Or maybe you realize you’d much rather be saving that 8 percent for a down payment on your first investment property. Build your budget to reflect how you want to spend, rather than just spending without a plan.
2. Control Your Spending
You’ve created a budget, but it’s just a first draft. Next, you’ll want to examine each category in your budget and experiment with how to reduce or eliminate unnecessary spending. Taking full control of your spending, rather than just spending out of convenience, is where you gain the power to build the life you want to be living.
Tackle the major spending categories: housing, transportation, food
As Scott Trench outlines in his book Set for Life, the top three spending categories for the average American household are housing (33 percent), transportation (17 percent), and food (13 percent). That’s more than 60 percent of the average budget! With such a high proportion of spending going into these buckets, it makes sense to begin here if you really want to make room for saving.
While these may all be “necessary” expenses, they don’t have to be such big percentages of your budget. If you’re paying top dollar to live downtown, buying new cars, and eating dinner out every night, you have room to cut. Even just average housing payments, car payments of any kind, and buying lunch out on most workdays could be more than you need to be spending.
Of these three categories, food is generally the easiest to tackle. Simply finding a lower-priced grocery store (I like Aldi), cooking at home, and bringing your lunch to work can save you hundreds of dollars per month. And you can implement these changes this week.
Housing and transportation may take a bit more time and planning to change, but they can also make the biggest impact. Start looking at these now and considering how badly you really need that 2,000-square-foot house or the brand new truck. Maybe 1,400 square feet would suffice. Perhaps a used car, paid for in cash, isn’t so bad for your daily commute. Be honest with yourself about what you really need, and be willing to make some changes!
Be intentional about paying down debt
Getting out of debt is a whole topic in and of itself, but I’d be remiss if I didn’t at least address debt payments. (For the purpose of this discussion, we’ll exclude mortgage payments, since real estate is an appreciating asset with various tax benefits!) If you have student loans, credit card debt, etc., you may be wondering if you should bother saving at all until these things are paid off.
At the very least, most experts recommend saving up an emergency fund. Even if it’s just $50 to $100 per month, building a buffer fund can save you from going deeper in debt when life takes an unexpected turn.
Beyond that, it’s up to you how much you put toward saving versus debt paydown. A common approach is to compare interest rates to inform your decision. If you are paying 20 percent interest on credit card debt and that money would only make you 8 to 12 percent in the stock market (or 0 to 2 percent in a savings account), then perhaps you should knock out your credit card debt before you start your savings.
However, if your debt is student loans at 5 or 6 percent, you may want to more actively save and invest while you pay those off.
Experiment with various spending cuts
As you created your initial budget, you asked yourself what you liked and disliked about your spending. Maybe you even identified budget items that you forgot you were paying for, like old gym memberships or magazine subscriptions! If you’re looking for some easy budgeting wins, here’s the place to start.
As you cancel the things you know you don’t need (when did you sign up for Bird Watcher’s Digest?), consider which items you could go without for a month. Think you could get through a month without your SiriusXM subscription? Cancel it, and see how you feel. Maybe you go a month and realize you prefer listening to free podcasts when you’re driving. You just cut another expense—without reducing your quality of life.
Is your spending more based on shopping trips, either physical or online? Consider banning yourself from taking trips to Target, or delete your online shopping accounts for a while. If you really need something, take the opportunity to try a lower-priced retailer, buy used items, or borrow from friends and family. None of these adjustments need to be permanent, but just giving yourself a month or two to experiment can open your eyes to new and more cost-effective options.
Shop around for essentials
There are some things you just can’t (or shouldn’t) cut. Once you’ve reduced unnecessary spending, consider whether there’s a way to negotiate these remaining items. While the cost savings may not be huge, talking with your current home and auto insurance or cell phone providers—and comparing them against the competition—could be worth a couple of hours on a slow afternoon. Every little bit counts!
3. Pay Yourself First
This popular personal finance mindset is much easier to adopt once you know your money and have taken some steps to reduce unnecessary spending! Now you can focus on paying into your future. Here are a few ways to get started.
Adopt an anti-budget
Few people are enthused by the idea of tracking and categorizing every expense, every month. It’s tedious at best and torturous for some. The good news is you don’t have to do it forever! Once you’ve created some better spending habits and started saving and investing more heavily, you can ease up on the spreadsheets a bit.
Here’s where my favorite budgeting method comes in: the anti-budget! While many personal finance authorities have discussed this idea, I first read the term “anti-budget” on the Afford Anything blog by Paula Pant. The idea is simply to save or invest a predetermined percentage of your income first, pay your bills next, and then not worry about how you spend what’s left.
So, if you make $4,000 per month and you want to achieve a 25 percent savings rate, pay yourself the $1,000 first. Then, pay your bills and spend what remains however you wish. Pretty low stress, right? It’s even easier when you can use technology to put things on autopilot.
Automate your savings
This leads us to automation. What better way to pay yourself first than to ensure the money you want to save is set aside for you each month? This can be done a couple of ways.
Investing in a 401(k) or other employer-sponsored investment vehicle? That money should be taken out of your paycheck before it even makes it to your bank account. You can also usually work with HR to have your paycheck split into two separate direct deposits—one to your checking account and one to your savings.
Finally, most banks make it pretty easy to go online and set up automatic transfers from your checking to various types of savings and investment accounts. Set these transfers to happen within a day or two of when your paychecks come through each month, and you’ll never even have to think about setting your money aside.
Get creative with “life hacks”
Now that you have your spending under control and you’re paying yourself first, you can start to get really creative! We don’t have the time to dive too deeply into life hacks in this article, but just knowing they’re out there can help you start researching creative ways to save even more than you thought possible. A couple of my favorite life hacks are house hacking and credit card points.
Chances are you’ve heard of house hacking already through BiggerPockets. It’s the idea of drastically reducing or eliminating that one-third of your budget that goes to housing costs. This can be done by renting rooms out to roommates, living in a small multifamily building where tenants pay your mortgage, or even live-in flipping your home. Regardless of your method, a house hack can greatly enhance your ability to pay yourself first!
As a travel addict, I’ve recently become a huge fan of credit card points as a life hack. A couple of weeks ago, I paid for three round-trip airfares for a family trip to Europe entirely with credit card points. That was over $2,000 I didn’t have to spend to fuel my travel obsession! Assuming you are able to use credit cards responsibly—meaning you pay them off in full every month—this hack may be an option for funding some of your travel or shopping habits.
What about your cable and internet expenses, transportation costs, or child care? Are there creative ways to “hack” these expenses? Some Google searching, chatting with frugal friends, or out-of-the-box thinking could lead you to a life hack that saves you hundreds or thousands each year!
4. Maximize Savings
You’ve taken some key steps to begin saving. Now, let’s supercharge your efforts!
Understand the difference between saving and investing
I’ve thrown out the words “saving” and “investing” a lot throughout this article so far. The title suggests we’re just talking about saving money. But for long-term goals, like retirement, you need to be investing the money you set aside. Let’s take a quick look at the difference between the two.
Saving can be defined as preventing waste of a resource. In this case, the resource is money. This is a good start. We want to avoid wasting money on unnecessary things so we can achieve big-picture goals—like investing in real estate or retiring early.
Investing, however, takes this a step further. Investing is defined as allocating funds with the expectation of generating an income or profit. This means putting the money you save into the stock market, retirement plans, real estate, or a business, where it can grow.
If you reinvest any income or profit back into the investment, that will grow, as well. This is compound interest, which Albert Einstein famously described as the eight wonder of the world. Mathematically, the difference in saving versus investing looks like this:
- Saving: $100 x 12 months/year x 20 years = $24,000
- Investing: $100 x 12 months/year x 20 years @ 10% annual return = $72,399
In this example, you can 3X your money by investing instead of just socking it away in a bank account! This is why it’s crucial to understand the difference between saving and investing. Short-term savings for a vehicle or vacation can sit in a savings account. Beyond that, consider investing your hard-earned money, so it can earn more on your behalf!
Maximize benefits from work
One of the easiest ways for many to boost their savings rate is to take advantage of employee-sponsored retirement plans like 401(k)s. There is a lot to learn about these investment vehicles that we won’t cover here, but something you must know is whether your employer matches any of the money you invest. In many cases, companies will match the first 3 to 5 percent that you put into an employer-sponsored plan. If this is a benefit your company offers, invest at least enough to get that match. Otherwise, you’re just leaving free money on the table!
Optimize investment accounts
This article is a beginner’s guide to saving, so we don’t have time to dive into all the different types of investment accounts here. Just know that there is more than one way to passively invest what you save, and the different vehicles come with different fee structures, tax implications, etc. If you’re ready to learn more about this, I highly recommend reading The Simple Path to Wealth by J L Collins. The book is relatively short and easy to read and will give you a great blueprint for optimal investing.
Look for high-yield accounts for savings
You now have a basic understanding of the difference between saving and investing. For the long-term, I recommend investing. However, you may still want a savings account for short-term or medium-term goals. If you are sitting on an emergency fund or saving for a big-ticket item, like a car or a down payment on a property, it may be worth looking for a high-yield savings account to make just a little more on your money. Many savings accounts pay less than 1 percent interest. Use a resource like NerdWallet to explore savings accounts offering 2 to 2.5 percent interest. 
Build your income
If you’re jazzed about saving, but feel you’ve exhausted all the options above, you can always look for ways to increase your income. Maybe the first place to look is in your current position by working harder for the next promotion or a big bonus.
Beyond that, you could consider selling things you don’t use, freelancing through sites like Fiverr.com, signing on for a flexible side job like Uber, or renting out a room in your house (again, house hacking!). There are countless ways to build your income and, therefore, your ability to save. As with the life hacks, this is another place to get creative!
You’ve taken a look at your past financial decisions, and you’ve determined how you want to change them going forward. You’ve learned to pay yourself first and begun to do so at a higher rate. You’re maximizing your savings by investing wisely, saving for big-ticket items, and maybe even bumping up your income. Now comes the really fun part: Watch it grow!
- Celebrate! Track your progress like it’s your favorite sports team. Use online calculators to determine how quickly you can retire. Celebrate your wins—big and small.
- Plan! All the things you used to wish you could do are now within your reach. Start planning that once-in-a-lifetime trip or researching the neighborhood where you’ll buy your first investment property. All your work to save has opened up new possibilities, so enjoy the whole journey.
- Find Balance! Is there a way you can better enjoy this journey by reducing your hours at work or deciding that it’s OK for one spouse to leave the workforce? Being intentional with your money can give you newfound freedom and flexibility.
There are so many incredible benefits to controlling your money rather than letting it control you. Saving and investing isn’t just about getting the absolute highest savings rate or achieving the largest possible dollar figure in your retirement accounts. It’s about having the control to design a life that you can truly enjoy, now and in the future! You don’t have to wait for retirement to enjoy the fruits of your labor. You can enjoy the whole journey if you stay intentional about how you spend, save, and invest.
Do you have any saving tips to add to this guide? Care to share any saving victories? Need advice about money missteps?
Let’s talk in the comment section below.