In 2024, the average American spends nearly $3,381 each year (roughly $282/ month) on impulsive purchases, reveals a survey by Capital One.
Unplanned spending thus makes up a staggering 21% of Americans' average monthly expenses (roughly $15,997, according to US Federal Reserve Economic Data).
The question of how to cut back on spending and save more money is one of the biggest questions facing the country right now.
The rest of this article is dedicated to showing you the most effective, practical strategies for reining in runaway expenditure while putting in more $$$ into the piggy-bank. Read on.
Establishing the Basics of Saving
Facing dwindling savings and mounting debt can seem overwhelming to anybody. However, the good news is that just taking the first small steps towards accountability can create significant shifts in spending habits and financial outlook.
Scientific research shows that the simple act of planning expenditure greatly reduces the likelihood of overspending and impulsive purchases. For example, making a grocery shopping list before heading out to the supermarket can help you cut back significantly on your bill at the checkout counter.
Start with a Plan
Building financial discipline starts with becoming aware – understanding your spending patterns. Begin by tracking every expense, from major bills to that daily coffee.
This visibility helps you identify spending trends and areas to cut back. Here are the steps to follow:
- Install a simple tool like a spreadsheet or free budgeting app.
- Organize expenses into categories, for example, needs, wants, and savings.
- Put every expense on the record.
- Pay particular attention to discretionary expenses or “wants”. (As the survey cited earlier shows, this category represents substantial potential for savings.)
For example, dining out, a common “want,” could be swapped for a fun, home-cooked meal that fulfills two goals — a combined family activity and more savings!
Set a Realistic Budget
Explore different approaches to creating a personal budget and trial them to find the one that suits your needs best. The most popular approaches are described below.
The 50/20/30 Approach
This method simplifies budgeting by dividing available income into three categories:
- 50% for needs (e.g., rent, utilities)
- 20% for savings or paying down debt
- 30% for wants, which can be scaled back to boost savings.
Tip: For those unused to financial planning, starting with a more comfortable savings target (e.g., 10% or 15%) and increasing it gradually might prove more sustainable. Remember, the habit matters more than the amount when you’re just beginning.
Zero-Based Budgeting (ZBB)
Zero-based budgeting is a highly detailed financial planning method involving the following process:
- Every dollar of income must be assigned a specific purpose.
- At the start of each budgeting cycle (typically monthly), you allocate funds to expenses, savings, and debt repayment until the balance equals zero.
- This method requires you to justify each expense.
- Allocations are dynamically adjusted as priorities change.
Pay Yourself First or 80/20 Budget
This approach prioritizes savings. It allocates a fixed percentage of income (often 20%) toward savings and investments before addressing other expenses.
The remaining 80% is used for essential and discretionary spending. It’s ideal for those focused on building wealth or paying off debt.
The 60% Solution
In this method, 60% of income covers committed expenses like housing, insurance, and essentials.
The remaining 40% is split into savings categories (e.g., retirement, short-term, long-term) and discretionary spending. It’s excellent for automating finances and maintaining a savings-focused lifestyle.
Value-Based Budgeting
Rather than adhering to rigid categories, this approach emphasizes spending on what matters most to the individual (e.g., travel or hobbies). At the same time, it requires minimizing expenses in less important areas.
For this approach to work, it requires individuals to have a lot of clarity. Also, it might be difficult to implement in case of families where members have differing interests and outlook.
However, if implemented successfully, this approach can not only boost savings, but also be highly motivating and thus easier to sustain.
Bare-Bones Budgeting
This minimalist method focuses only on necessary expenses. Every remaining dollar is funneled into either savings or debt repayment.
This aggressive budgeting approach can be particularly useful for those looking to recover from financial setbacks, or to catch up with their retirement planning.
Mastering Savings Habits
Developing consistency in savings habits is crucial for achieving financial goals. Here are the three golden rules of saving to help you stay on track.
Rule #1 — Automate Your Savings
Make saving a priority. Set up automatic transfers to a dedicated savings account as soon as you receive your paycheck.
This way, the temptation to spend cannot and will not interfere with your savings plan. Today, most banks and apps allow you to schedule automated transfers, ensuring consistency and punctuality.
Rule #2 — Leverage the Power of Compound Interest
Compound interest <link to PL article on how compounding works> allows your money to grow faster, as you earn interest on both your initial deposit and previous interest.
Maximize your savings by using accounts with competitive interest rates. Accounts with high Annual Percentage Yields (APYs) are particularly effective for long-term goals like retirement.
Rule #3 — Follow the ‘1% Policy'
Increase your savings incrementally. Start by saving just 1% of your income. Gradually raise this target, 1% at a time.
Sticking to this percentage makes the process more manageable and helps develop a habit of saving without feeling overwhelming.
These strategies, combined with the discipline to apply them steadily, will ensure that you progress steadily toward financial stability.
Overcoming Savings Challenges
Building savings can be difficult, especially when juggling tight budgets or unexpected expenses. By implementing these 5 practical measures, you can overcome the most common challenges to saving consistently
Step #1 — Cut Non-Essential Spending
Identify areas where you can economize. The usual suspects include:
- Dining out: Replace this with a home-cooked meal. Even a simple meal like omelets or stew can be fun to cook with friends or family, and delicious to eat.
- Entertainment: Find free events such as a local art exhibition or community barbeque event. Similarly, cancel unused or expensive subscriptions and switch to free options such as movies and shows freely available on YouTube.
- Personal Care: Step down the frequency of expensive grooming and personal care such as visits to salons and spas. Instead, encourage a talented friend or neighbor to practice on you.
Step #2 — Adopt the 24-Hour Rule
Delay non-essential purchases for 24 hours. Evidence shows that this ‘cooling-off period' reduces impulse buying. After waiting it out, if you still go ahead with the purchase, the odds are much higher that the item aligns with your priorities.
Step #3 — Embrace the Rule of Halves
For every “want”, that is, discretionary expense, consider saving half of the intended spending. For instance, if you plan to spend $100 on dining out, allocate $50 to savings instead.
This balance ensures that you still get to enjoy small luxuries, while staying committed to financial goals. An added bonus is that it forces you to find creative solutions to fulfill your wants (such as using an app that identifies great dining out deals and discounts).
Step #4 — Automate Windfalls for Savings
Whenever you receive unexpected income, direct a large portion—or all of it—into savings.
It could be a bonus, tax refund, an unexpected inheritance, a gift or any other windfall. Channeling additional income towards savings offers two-pronged benefits:
- it prevents unplanned spending
- it boosts your reserves
Step #5 — Set a Savings Floor
Commit to saving a fixed minimum amount each month, no matter what. Keep this ‘floor amount' modest, to ensure you meet the target. Even modest contributions help maintain the savings habit and sustain your motivation.
Smart Shopping Strategies
In an era of constant consumer temptations, smart shopping is a critical skill for financial wellness. By implementing strategic approaches to purchasing, you can significantly reduce expenses without sacrificing quality of life.
Coupons and discounts
- Leverage digital platforms and apps that aggregate discounts across multiple retailers
- Use browser extensions that automatically apply coupon codes at checkout
- Sign up for store newsletters to receive exclusive promotional offers
Loyalty programs and rewards
- Join loyalty programs for stores you frequently shop at
- Use credit cards that offer cashback or points on specific spending categories
- Stack rewards by combining credit card points with in-store loyalty discounts
- Redeem rewards before they expire
Timing purchases
- Shop during major sales (Black Friday, Cyber Monday, end-of-season clearances)
- Use price-tracking tools to monitor fluctuations for big-ticket items
- Buy seasonal items during off-peak periods for lower prices
- Opt for last year's models (at lower prices) when new versions are released
Alternative shopping channels
- Explore consignment stores and online marketplaces
- Check out local buy/sell/trade groups on social media
- Consider refurbished electronics from certified sellers
Shop with an eye on long-term savings
- Prioritize energy-efficient appliances that reduce long-term utility costs
- Look for items with good warranty and repair support
Shopping expense management
- Set strict monthly spending limits for “wants”
- Use cash or prepaid cards to prevent overspending
- Unsubscribe from marketing emails that trigger impulse buying
Smart Transportation Savings
Automotive expenses can be a serious drain on your budget. Here are some tips and tricks that can significantly reduce transportation costs, helping boost your savings:
Refinance auto loans
- Compare rates from multiple lenders
- Negotiate lower interest rates
- Consider shorter loan terms to reduce total interest
Minimize insurance expenses
- Shop and compare quotes annually
- Bundle policies for discounts
- Increase deductibles to lower premiums
- Maintain a good driving record
Reduce maintenance and fuel costs
- Perform regular, preventive maintenance
- Use fuel price comparison apps
- Consider hybrid or fuel-efficient vehicles
Additional strategies
- Explore car-sharing or ride-sharing alternatives (such as Getaround for local commuting and Turo while traveling)
- Use a carpool to split transportation costs, particular for long, daily commutes
- Use public transit when feasible
- Combine errands to reduce overall driving
Financial Goals and Growth — Savings Through Investment
Set SMART Goals
Begin by setting SMART (Specific, Measurable, Achievable, Relevant, Time-bound) goals. For example, you might target saving $5,000 for a vacation in two years or building a $20,000 emergency fund within three years.
It is much easier to stay focused, measure progress (and sustain motivation!) when you have clear targets to work towards.
Tip: One practical strategy is to divide goals into short- and long-term goals. Be sure to set a clear time-line for the achievement of each goal, for example, “I will save $XXX for a new exercise bike in 90 days.”
- Short-term goal examples: Emergency funds, small vacations, new laptop
- Long-term goal examples: Retirement, home down payment, educational savings
Prioritize goals
Tackle high-priority needs first. For example, between emergency savings and the next vacation, the priority should obviously be the former. Similarly, in the long term, retirement contributions should be top priority.
Strategic Investment Choices
Most people simply cannot rely on savings from their earnings alone as a means of retirement income. Investment is therefore not just a desirable choice, it's a necessity.
Formulating a strategic investment plan is key to growing savings in a manner that balances risk against return. Although there is no one-size-fits-all solution to investment decisions, as financial goals and individual priorities differ widely, here are some rules of thumb to follow in considering investment options:
- For short-term goals, where liquidity and safety are priorities, low-risk options like high-yield savings accounts or certificates of deposit (CDs) might be better suited.
Check out this helpful article on CDs and alternative savings tools.
- For long-term goals, consider tax-advantaged accounts like 401(K)s or IRAs if minimizing risk is a priority. Options with greater risk that offer significantly greater returns include mutual funds, exchange-traded funds (ETFs) and stocks.
For an in-depth discussion of building retirement savings using 401(K) vs. IRAs, check out this helpful post.
Automate and diversify
Automation is a modern boon for ensuring consistency in savings and investments. Set up automatic weekly, monthly or bi-monthly contributions to your various savings and investment tools so that work pressure, deadlines or stress do not disrupt progress towards your financial goals.
Diversifying across asset categories is the single best strategy for mitigating investment risk. A balanced portfolio that includes low-risk as well as medium-risk investments is typically the best suited to meeting both safety and growth goals.
Saving for Retirement — Dos and Don'ts of Staying on Track
Staying on track with savings requires mindful habits and avoiding common pitfalls. It's easy to get distracted and derailed by crises and social pressures.
Follow these guidelines to stay focused on what's truly important – a secure future for yourself and your loved ones.
Dos to Give Your Savings a Boost
Monitor progress
Set up monthly or at least quarterly reviews to ensure that you're on track with your savings plan. Make use of budgeting app features such as reports and graphs for fresh insights that can help you plug expense leaks or improve economy.
Reassess priorities
Adjust your budget to reflect life changes, like a new job or major expense. Be mindful to avoid disrupting your savings plan while accommodating these changes.
For example, if budgeting to move house, it is advisable to cut back on discretionary expenses. In the long run, it is far wiser to downgrade to a cheaper salon or plan lower-budget outings for a few weeks or months, while keeping automated savings deductions on track.
Capitalize on opportunities
During peak earning years, boost contributions to retirement accounts like 401(k)s or IRAs. Take advantage of employer matches and catch-up provisions for those over 50. Likewise, consult with an expert (CPA or CA) to identify and capitalize on tax benefits wherever possible as income and expenditures grow and diversify.
Don’t Harm Your Savings by Doing This
Overspend on lifestyle upgrades
Keeping up with the Joneses can prove costly.
Avoid succumbing to the lure of an expensive car or luxury home in your peak earning years. These expenses increase financial strain in the short term, and in the long term, they can eat into and even derail savings goals.
Ignore inflation
Ensure that your savings and investments outpace inflation. Thus, for example, low-risk investments such as (most) CDs tend also to offer lower returns that are not proof against inflation. Build a diversified portfolio that includes a healthy percentage of growth-oriented assets like stocks or ETFs.
Withdraw retirement funds early
Withdrawing retirement funds such as 401(K) prematurely incurs penalties and disrupts compounding growth. Creating an emergency fund is one of the best ways to avoid finding yourself in a situation where premature withdrawal becomes necessary.
Next Steps
You now have a strong grasp of savings strategies, and you’re ready to take control of your financial future.
Remember – action beats intention.
Turn your newly gained insights into habits and watch your savings grow. Whether it’s automating savings, setting SMART goals, or tackling challenges with discipline, every step forward takes you closer to financial stability.
If you'd like to get into action by expanding your financial knowledge, you can:
- Enroll in a free course on personal bookkeeping to refine your budgeting and expense-tracking skills.
- Book a one-on-one coaching session to create a customized financial plan tailored to your goals and circumstances.
Your path to financial security begins here.