In a recent post, we talked about why you should save money, including how to build resiliency to emergencies and give yourself more freedom of choice in life. But what about the how of saving money? When you live paycheck to paycheck, saving money in any meaningful way can feel impossible. Matters become even more difficult if you’re taking on credit card debt to make it through each month. 

Here are some real steps you can take to gain control of your finances and start saving money even when you’re living paycheck to paycheck.

Understand That You Don’t Need to Make a Ton of Money to Save

Here in New York City, now officially America’s most expensive place to live, there’s a widely shared sentiment that you’re not going to save any money unless you make well over six figures. But take it from us, your local financial planners, that there are people here in Manhattan who still save money with salaries of less than $60k as well as people who can’t save money even with salaries of more than $150k. 

One major reason for why you’ll find people of all income levels living paycheck to paycheck is something called lifestyle creep. As income rises, we find ways to improve our standard of living. We might decide we can afford a better apartment, or we’ll spend more money dining out at restaurants and traveling. But the downside to that is that we quickly grow accustomed to our new standards of living. Then, we’ll still continue spending as those standards increase, even if our income drops. Two major ways to prevent lifestyle creep are 1) living within your means and 2) bumping up the amount you automatically save toward things like retirement plans or other savings accounts every time you get a raise. 

Another thing to keep in mind is that during the ebbs and flows of life, you have the ability to change your income. Think about the long-view. If you can’t save money right now, don’t be disheartened. Old-fashioned ideas tell you that you should have certain amounts of money saved by certain ages and be ready to retire by age 65; or that you have to always be putting away a certain percentage of your income. Maybe your income is low right now because you’re still growing your career, in which case you have plenty of time to catch up down the road. There’s also an old-fashioned notion that you’re supposed to work full-time in one job until you’re ready to retire, and then you’re supposed to live off your savings for the rest of your life. In reality, your life may involve many career changes, periods of full-time work, part-time work, or even no work, and varying levels of income. 

Map Out Your Cash Flow

The first action step toward saving is to understand exactly how much money is coming in the door and how much is going out the door. Don’t be intimidated by this! It doesn’t need to be an exact science. Hop into a spreadsheet, or grab a piece of paper, and start listing out all of your monthly expenses and break them out into two categories: fixed and variable. Fixed expenses are mostly unchanging, like rent, utilities, car payments, and insurance. Variable expenses fluctuate, like groceries, dining out, and travel. If you have expenses that occur annually, divide them by 12 so that you can see a monthly breakdown. The idea is to keep it extremely simple. Here’s an example of what your breakdown might look like:

Your cash flow picture is always changing, but the key is to get a representative snapshot of your fixed and variable expenses. Compare your monthly spending to your monthly take home pay. Are you falling short, or do you have extra wiggle room? Once you know where you stand, target which areas of spending you could trim. Or, you might be surprised to find that you have some wiggle room to set aside money each month into a savings account. In the hypothetical scenario above, what actions would you take to lower the spending so that there’s the ability to save?

Automate Your Savings

We always suggest clients treat savings like a bill, as if it were a line item like your phone bill or utilities. The best example of automation for savings is in an employer-provided retirement plan like a 401k. If you have a 401k and contribute to it, it’s likely that you don’t even notice that money coming out of your paycheck. You just make do with the remaining money that hits your checking account each pay period. 

I once heard some really good advice from a financial professional about the percentage of money you should put toward a retirement plan: “Keep increasing it until it stings.” You can easily dial up or down your 401k contributions each pay period, so keep bumping it up until you feel you’re at the maximum of what you can handle. 

Automate transfers of money into your savings and brokerage accounts, too. Whether it’s a percentage of your income or a certain dollar amount, decide what feels right for you. Start small, and see how much you can increase it until you’re either hitting your savings targets or noticing that it’s too much. Of course, it’s good to have intention behind your savings and tie them to your values and future goals. But if you’re not sure what to save for, at the very least save something, even if it’s $50 a month. Your future self will thank you!

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