Everybody wants to have more money. However, it isn’t always easy to save up money when your income is restricted, you have outstanding debt, or emergencies just keep piling up!
The art of saving money isn’t always easy—especially during tough times. However, following a few simple money-saving ideas can help you get there (even if it might take a while). Let’s take some time to explain why you need to start setting aside some money, a few of the best money-saving tips for your daily life, and some advice for building good money-saving habits.
Why You Need to Start Saving Money
There are a ton of reasons why you might need to start saving money. A few examples include:
1. To Pay for a Home, Car, Vacation, or Other Big-Ticket Item
For a lot of people, the main motivation for saving is to, at some point, use that money for a major personal or family purchase. This includes things like a downpayment on a home, buying a car, going on vacation with the family, or setting aside money for education.
Whatever the big-ticket item is, it can take a lot of time and patience to set aside enough liquid cash to pay for it—even when you’re following the best tips on saving money! Saving for a down payment on a home can be particularly tough since the value of a home (and thus, the amount you need to save) can fluctuate significantly over time!
2. To Start Investing Early
Another reason why some people may want to set aside as much money as they can as early as possible is to take advantage of compound interest on certain investments (such as retirement funds).
For certain investments, putting aside a little money early on can have a major impact on your savings— versus waiting just a few years before retirement to start saving—thanks to the magic of compound interest. The longer your money can sit and benefit from compounding interest, the wealthier you’ll be.
For example, if a 25-year-old invests $1,000 earning 5% interest, compounded annually, by the time they’re 65 years old they will have $7,039. But if they had waited until they were 55 years old to make that same investment, they would only have $1,628 by the time they were 65.
In both scenarios, they invested the exact same amount of money with the exact same interest terms. However, they would have ended up with more than four times the wealth if their money had stayed invested for 40 years versus just 10 years.
Compounding interest means that each year, the interest earned is based on ALL of the other accumulated years of interest. The interest component continues to grow on an ever-increasing balance. The interest is never withdrawn—it stays invested. So the interest you earn starts earning interest itself—it’s no longer just your $1,000 that is earning interest.
The longer your money can remain invested, the more you will benefit from compound interest. And, if you add more to your investment over the years, your wealth grows exponentially.
For example, say at 25 years old you make that same investment of $1,000 earning 5% interest, compounded annually. But you also invest $100 every month until you’re 65. After 40 years, you would have invested $49,000 but you will have $155,292. Not too shabby.
On the other hand, if you wait until you’re 55 years old to start investing, you would need to invest $1,000 every month to have roughly the same amount of money by the time you’re 65 years old. And you would have invested a total of $121,000 of your own money versus $49,000.
The lesson here is if you start investing early, you don’t have to invest very much. Compound interest just needs time for you to see its explosive growth pattern, which is why it can be so tough to know when to save versus invest your money.
3. To Get Rid of Debt
Getting out of debt can be a major motivating factor behind the decision to start saving money. While saving money when dealing with debt can be difficult, it’s not impossible.
Setting aside some extra money each month to put towards paying down debt can be a challenge, but being able to do so can pay off big time. Remember that example from earlier about compound interest? Well, compound interest is wonderful when you’re saving money and investing in yourself, but it’s not so great when it’s related to unpaid credit cards.
Let’s say you have a credit card with a balance of $1,000 and the interest charged on that credit card is 19.99%. If you didn’t make any payments and that credit card charges compound interest, you would pay about $16.66 in interest charges after the first month, which would bring your new balance up to $1,016.66.
But now that your balance has gone up, so have the interest charges. So instead of paying $16.66 in interest, the following month you would pay $16.94; then $17.22 the next month, making your balance swell with every passing month.
The original $1,000 balance will grow in small increments at first, but given enough time, there will be explosive growth. Keep in mind there may be additional costs too—like over-limit fees, other charges, and even potentially higher interest rates.
Paying off debt before it has a chance to accrue interest can save you a lot of money! How much money? Use our Debt Calculator to find out!
4. To Prepare for Emergencies and Unexpected Costs
Another common reason people look for money-saving tips is to set aside some cash for a potential emergency. Events like the COVID-19 pandemic helped demonstrate just how important it can be to have some cash set aside to get us through tough times, like a job loss or illness.
But we also have to save for unexpected costs that can come up in our day-to-day lives. Unexpected costs are typically much smaller and less impactful than a full-blown emergency, such as losing your job or a global pandemic that brings whole economies to their knees. Examples of unexpected costs can include:
- Home repairs, such as fixing a leaky roof or a burst pipe
- Having to replace a tire after one pops because of road debris or wear
- Hiring a babysitter because you have to work late
- Getting a last-minute gift or flowers for an impromptu event or occasion
When an unexpected cost pops up, having the cash on hand to cover it can mean the difference between accruing debt and staying out of debt.
Tips for Saving Money
Now that we’ve discussed some of the basic reasons behind building up your money savings, how can you actually do it? There are a ton of different money-saving ideas that you could use to start building up your bank account—even if it’s just a little bit at a time.
Tip #1: Consider Focusing on Paying Down High-Interest Debt before Focusing on Savings
The interest charged on debt is typically much higher than the interest earned with most savings accounts (think 19% versus 2%), so, it often makes more sense to focus on paying down debt before you put money towards savings.
If your savings reliably grow at a rate of 2% a year, but a debt of equal value accrues 19.99% interest a year, you’ll save far more money in the long run by paying the debt down first.
Tip #2: If You Have Automated Savings Tools, Use Them!
Different banks may have different tools to help you automate your savings. For example, virtually every bank or credit union will give you the option of automatically transferring some money out of your chequing account into a savings account at regular intervals (or to another investment account). Other banking institutions might offer a “rounding” service, where they round up your transactions to the next dollar and put the difference into a savings account.
This can help with your money-saving strategy in a couple of ways. First, it helps you put aside money without requiring any extra effort on your own part. Second, having less money on hand to spend can help you curb your impulse spending.
Tip #3: Make a List of Financial Goals You Want to Achieve
What do you want to do with the money you’re saving? It’s often easier to stay motivated and keep saving money if you have a goal in mind for that money.
Whether you want to pay off debt, buy a car, save for your retirement, or just be ready for an emergency, money savings can mean more to you when you have a set goal in mind.
Tip #4: Create a List of Your Top Expenses
Take some time to start tracking your expenses for a few months and take a long, hard look at what you’re spending money on. This can help you set a budget and identify some key money-saving opportunities.
For example, if, after a month of tracking your spending habits, you notice that you’re spending more on takeout than you thought ($8 meals really add up fast when you’re eating out once or twice a day), you might want to cut back. You might even identify other spending habits that you have which you wouldn’t really think about in your day-to-day routine, like how much you’re really spending on groceries or lottery tickets.
You can use our budget planner and expense tracking tool to help you keep track of your expenses and identify areas in your budget where you can cut back.
Tip #5: Don’t Be Afraid to Ask for Help
Who says that you have to go about saving money all on your own? There’s no requirement saying you can’t seek help from someone else to create spending plans or provide advice for your money-saving strategy!
This help could come from your friends, family, or even a non-profit credit counselling service like Credit Canada! Sometimes, an outside perspective could prove to be a priceless resource for helping you set aside more money, reduce wasteful spending, or identify the best ways to invest your spare cash for the future!
Need help from one of the best credit counselling agencies in Canada? Our certified Credit Counsellors are here for you! All our counselling services are free, confidential, and non-judgmental.
You can reach us online or by phone at 1.800.267.2272!