When your income barely covers your monthly expenses, it can be tough to find extra money to put into savings. Yet putting aside money for emergencies and future goals is an important part of building long-term financial security. The good news is that there are several strategies you can use to cut costs and begin saving.  

In this article, we’ll cover these savings tips:

1. Estimate your income
2. Identify your fixed monthly expenses
3. Manage your variable expenses
4. Don’t forget about periodic expenses
5. Prepare for unexpected expenses
6. Compare your income and expenses
7. Choose your budgeting method
8. Remember to budget for discretionary spending
9. Implement the 30-day rule
10. Try a cash diet
11. Delete online payment info
12. Plan out meals to reduce food waste
13. Be strategic at the grocery store
14. Make more coffee at home
15. Reduce restaurant spending
16. Use a cashback credit card
17. Opt for thrift stores and local shops
18. Use browser extensions for online shopping
19. Explore community events and free concerts
20. Compare car insurance plans
21. Maintain a good driving record
22. Take a close look at your coverage level
23. Remove policy add-ons you don’t need
24. Switch to LED bulbs
25. Optimize laundry habits
26. Adjust your refrigerator temperature 
27. Use your dishwasher’s air-dry setting
28. Manage home’s temperature
29. Change furnace filters regularly
30. Conduct a home energy audit
31. Cancel unnecessary subscriptions
32. Look for ways to save on essential subscriptions
33. Choose a debt repayment strategy
34. Consider debt consolidation
35. Establish an emergency fund
36. Plan for short-term goals
37. Set medium-term goals
38. Focus on long-term goals
39. Check your current savings account interest rate
40. Switch to a high-yield account for better earnings
41. Automate transfers to your savings account
42. Define your financial goals and values
43. Limit your time on social media
44. Have a weekly money date
45. Celebrate your financial wins

Track your spending against your income

Scouring through a list of all the best ways to save money can be fun. But before start trimming down your spending, you need to get a clear picture of where your money is going every month. So, the first step in saving money is to track your spending and compare it to your income. 

Here’s how.

1. Estimate your income

Income is all the money you bring home. You need a clear picture of what’s coming in to make sure you have enough to cover your expenses and savings goals. Make a list of all sources of income, which might include:

• Your net pay from your job 
• Extra cash you make from a side hustle or passive income stream
• Child or spousal support
• Disability or veterans benefits
• Dividends or other income from investments

2. Identify your fixed monthly expenses

Fixed expenses are your life’s must-haves. They’re usually consistent every month. Understanding these is crucial for creating a budgeting plan and avoiding credit card debt. Common expenses include: 

• Rent or mortgage
• Utilities, like electricity, water, and gas
• Phone and internet
• Health insurance
• Healthcare, like prescriptions and regular doctor appointments
• Minimum debt payments, such as student loans and car payments
• Transportation, like bus fare, gas usage, car insurance
• Childcare and school tuition
• Streaming services and subscriptions
• Membership fees, like a gym or co-working space 

3. Manage your variable expenses

Variable expenses are just like they sound: spending that varies from month to month. While the amount of money you spend may change, you can get an average by tallying up what you’ve spent over the last six months and dividing by six. Expenses you may want to capture:

• Groceries
• Dining out
• Entertainment
• Pet costs, such as food, grooming, doggy daycare
• Home maintenance
• Medical and veterinary bills
• Travel
• Gifts
• Personal care and wellness

4. Don’t forget about periodic expenses

Periodic expenses occur less frequently, so they’re easy to forget about. But you’ll need to add them to your budgeting plan if you want a complete picture of your finances. The key is to break these costs down into how much they cost monthly. 

For example, if it costs $120 a year to renew your car’s tags, divide that amount by 12 to get $10 a month; that’s how much money you’d need to put aside each month to have the amount you need when the bill comes due. Check your records for expenses like:

• Annual vehicle registration
• Annual tax preparation
• Quarterly utilities
• Subscriptions that renew annually
• Car maintenance
• Home maintenance
• Periodic healthcare, like new glasses or annual physicals 
• Clothing and shoes
• Household items and furniture

5. Prepare for unexpected expenses

Unexpected expenses like emergency repairs and medical bills are unpredictable. Creating an emergency fund can be a good way to cover these costs without having to rack up credit card debt. Some unexpected expenses you could save for include: 

• Car or home repairs
• Medical and dental bills 
• Unplanned travel
• Emergency vet bills
• Weather emergencies
• Replacement appliances
• Unexpected sudden loss of income

6. Compare your income and expenses

Once you’ve gathered the info about your income and expenses, it’s time for some simple math. Add up all your monthly expenses, including averages for variable expenses and periodic expenses. Then tally up your monthly income. 

When you compare the two numbers, ideally your income will be larger than your expenses. If it’s not, you may want to consider how to save money by reducing discretionary spending or trimming the cost of necessities.

Create a budget that works for you

With your list of income and expenses in hand, you’ll be ready to make a budget. In its simplest form, a budget is a list of your planned monthly income and expenses. Once you set it up, you can track spending in real-time, compare it to your plan, and adjust as needed. 

Making and sticking to a budget is half the battle of saving money. It gives you a clear picture of your finances in real time and helps you plan for your goals, like getting out of debt, saving up for a vacation, or building an emergency fund. 

It also allows you to manage short-term spending, like whether you can order take-out for dinner without putting yourself in a pinch when your car payment is due. 

7. Choose your budgeting method

There are many approaches to budgeting, including budgeting for young adults. While they all have benefits, what matters is finding one that works for you. Here are a few popular budgeting methods you might try:

• 50-30-20 budgeting: You categorize your expenses and allot income accordingly: 50% to needs, 30% to wants, and 20% to saving and investing.
• Zero-based budgeting: You assign every dollar to a specific expense so that the difference between your income and expenses is zero. 
• Pay yourself first method: Each month you first set aside money for saving and investing, which cuts spending and prioritizes your long-term goals.
• Envelope method: You allocate funds to expense categories and put the money into literal or digital envelopes; when an envelope is empty, your spending on that category is done for the month.

8. Remember to budget for discretionary spending

While budgeting for the necessities, be sure to include space for some discretionary spending in your budget too. This promotes healthier spending habits, as it can be easier to stick to your spending plan when you have money specifically set aside for fun. Also, it can give you a bit of a buffer if you underestimate your needs in one of your budget categories.  

Cut out impulse purchases

Everyone has those moments: the last thing you want to do after a long day is cook dinner, so you open a restaurant delivery app and unwittingly spend a good chunk of your grocery budget on one meal. Or an ad for a cool jacket pops up on your screen, you click the link, and suddenly you’ve spent money you’d planned to put in savings on something you don’t really need. 

Impulse spending is only human, but it also creates a huge barrier to saving money. Consider trying these tricks to help you put the brakes on that spur-of-the-moment spending that undermines your budget plans.

9. Implement the 30-day rule

If you find you want to make an unplanned purchase, set the money aside and wait 30 days. This is known as a 30-day spending rule. If after a month you still want to buy the item, go ahead. But you may find that the delay takes some of the shine off of the thing that seemed so appealing at first glance, and a month later you might decide to put that money into your savings account instead.

10. Try a cash diet

A “cash diet” is where you commit to only making impulse buys in cash. Build it into your budget with an “allowance,” then take the money out in cash at the beginning of the month. Swiping a card makes impulse spending that much easier, but handing over actual cash has a greater psychological impact and makes you stop and think about the purchase more carefully. 

11. Delete online payment info

The more effort it takes to shop online, the more likely you’ll be to pause and think about whether you truly want to fork over your money on a whim. Delete your saved debit or credit card information on any website where it’s stored and forget the autofill option; when you want to buy something, get your physical card and enter the number. That little work might prod you to think about your budget and saving goals.

Look for ways to save on food

If you’re like most people, food is one of your three biggest spending categories. Between groceries and dining out, it can add up quickly. Here are a few ways to trim down food costs.

12. Plan out meals to reduce food waste

Feeding America states that America wastes 80 million tons of food, totaling $444 billion, each year. The USDA adds that the average American family of four loses $1,500 to uneaten food per year.

Planning out your meals and snacks for the week helps prevent groceries from being wasted. For instance, if a recipe calls for half a head of cauliflower, you can plan to use the other half later in the week instead of watching it go bad in the fridge.

13. Be strategic at the grocery store

Efficient grocery shopping and meal planning can lead to significant savings. Here are some other ways to help keep your grocery costs down and foster better savings habits:

• Scan sale circulars and grocery store apps to find the best deals, and use print or digital coupons. 
• Consider shopping at several grocery stores to get the best price on different items, if time allows. 
• Check your pantry before heading to the store so that you don’t double up on products you already have.
• Shop from a list, which will help you avoid impulse spending on products that grocers put in special displays.
• Purchase items in larger quantities and use them in several meals throughout the week or freeze portions for later use.
• Buy store brands or generic brands instead of name-brand products. Most have the same ingredients.
• Keep grocery trips down to once a week, if possible, which will force you to use up the food you already have at home.
• Shop online and pick up your groceries to avoid the temptation of going off your list while browsing the shelves.

14. Make more coffee at home

It’s probably not a good idea to cut out a coffee shop for good. It’s a cozy experience all in itself. But frequent visits to the coffee shop can quickly add up, especially when a large oat milk latte can easily cost $7, plus tip. Consider brewing more coffee at home and treating yourself to your favorite coffee shop once or twice a week.

15. Reduce restaurant spending

Dining out often can significantly impact your budget. Limit restaurant spending by exploring new recipes at home, opting for takeout over dine-in to avoid additional costs like tips, or taking advantage of restaurant deals and specials.

You don’t have to cut out restaurant food completely. Start with small amounts. Try to eat out one or two fewer times per week than you do now. Over time, continue to trim it back until your food budget is where you want it to be.

16. Use a cashback credit card

For necessary purchases like grocery shopping, consider using a cashback credit card. These cards return a percentage of the amount spent, reducing the overall cost and potentially saving you money over time. 

Only use this strategy if you’re sure you can pay your credit card balance in full each month. Otherwise, stick with your debit card or look for a debit card that earns rewards. 

Discover ways to save on shopping and entertainment

There are tons of ways to save on shopping and entertainment. Explore these practical tips to cut down your expenses while still having fun.

17. Opt for thrift stores and local shops

Skip the brand names and shop at thrift stores and local stores in your own city instead. You’ll find unique items at lower prices and keep your shopping cart total low. Plus, you’re supporting the community!

If you find yourself on a wedding guest list, use online thrift stores like Poshmark and Tradesy to snag the perfect outfit at a discount.

18. Use browser extensions for online shopping

Online shopping is convenient but can lead to overspending. To avoid this, use browser extensions. They help compare prices and find discounts, ensuring you don’t miss out on lower prices and keep those small amounts from adding up.

19. Explore community events and free concerts

One of the easiest expenses to reduce is entertainment costs. Your own city likely offers numerous free attractions and activities. 

• Explore local parks or community spaces for a change of scenery without the added expense. 
• Visit museums with no admission fees and community centers that host free events. 
• Look for free concerts that not only offer entertainment but also provide a chance to socialize and discover local talent.

Save money on car insurance 

There are many avenues to explore when looking at how to save money on car insurance: comparing plans, maintaining a good driving record, and taking a close look at your coverage level and add-ons.

20. Compare car insurance plans

Even if you’re happy with your current insurance company, requesting quotes from several other companies might reveal opportunities for saving money if you switch. You can also call your current insurer and ask if you’re eligible for any discounts; they’re often willing to offer an incentive to keep your business. 

21. Maintain a good driving record

Car insurance rates are based on several factors, including your driving record and your credit score. That means being a safe driver and improving your credit can save you money on car insurance. 

22. Take a close look at your coverage level

If you don’t have an outstanding loan on your car, another way to save money is to change the type of coverage you carry. Generally, there are three types of coverage available: 

• Liability insurance: Liability covers only the other person’s damages if you get into an accident; this is the minimum level of coverage required by law.
• Collision insurance: Collision pays to repair damage to your car if it crashes into another vehicle or object.
• Comprehensive insurance: Comprehensive covers damages and pays if your car is stolen or damaged by storms, vandalism, or hitting an animal. 

Collision and comprehensive insurance never pay more than what the car is worth. So, if you have an older car that’s worth less than your deductible plus the cost of annual coverage, you might be paying more than you need to; you could save in the long run by only carrying the liability insurance mandated by your state.

23. Remove policy add-ons you don’t need

Review your current policy to see if you’re paying for any add-on services that you don’t need. Many policies offer extras like rental car reimbursement, roadside assistance, or windshield repair. If you’re paying for them, consider whether they’re really worth the cost. 

Once you finish this process for car insurance, do it again for life insurance, home insurance, and any other policies you have.

Reduce your energy costs

Saving money on electricity can add up over a year. Much like with groceries, one of the simplest ways to start is to reduce waste. A few simple habits can boost efficiency and shave dollars off your bill.

24. Switch to LED bulbs

LED bulbs use 75% less energy than incandescent bulbs. Making the switch can work wonders in helping you cut down on your electricity bill.

25. Optimize laundry habits

Wash your clothes in cold water and avoid overfilling the dryer to conserve energy. Adopting these simple habits can significantly lower your energy consumption and reduce your utility bills.

26. Adjust your refrigerator temperature 

Maintain your refrigerator at 37°F and your freezer at 0°F, and clean the coils periodically to ensure optimal efficiency. Proper temperature settings and regular maintenance can help prevent unnecessary energy use and prolong the life of your appliance.

27. Use your dishwasher’s air-dry setting

Use the air-dry instead of the heat-dry setting on your dishwasher to save energy. This small adjustment can make a noticeable difference in your energy bill without compromising the performance of your dishwasher.

28. Manage home temperature

Close shades on hot days and turn off the air conditioner when not needed to reduce cooling costs. Being mindful of home temperature and making adjustments based on the weather can lead to substantial energy savings.

29. Change furnace filters regularly

Regularly changing your furnace filter ensures it runs efficiently, saving you money in the long run. A clean filter improves air quality and allows the furnace to heat your home more effectively, avoiding unnecessary energy waste.

30. Conduct a home energy audit

If you own your home, consider making energy-efficient updates. Your local utility company or a professional home inspector can conduct a home energy audit and tell you how much energy your home uses, where inefficiencies exist, and which fixes you should prioritize to save energy. 

Review your current subscriptions

Have you been keeping up with your Mandarin lessons, or is it time to let go of that language-learning app? When you turn on the TV, how many services do you rarely, or never, actually use? 

31. Cancel unnecessary subscriptions

When you’re looking for savings opportunities, review all your subscriptions. Keep the ones you use at least three times a week and cut ties the rest. Look at things like phone apps, music services, TV and movie streaming, print and digital publications, and any free trials you signed up for but forgot to cancel. What do you really use and need? Cancel subscriptions that don’t enhance your life.

32. Look for ways to save on essential subscriptions

There may be ways to save money on some of the subscriptions you want to keep. For example, some services have multiple tiers or allow you to share an account with friends and family to split costs. Also, some phone or internet plans have a streaming service included. Check to see if your library has a video or music streaming app.

Pay off high-interest debt

Whether it’s personal loans, student loans, auto loans, credit card bills, or mortgages, around 340 million Americans carry some form of debt. Saving money can be a struggle when your budget is burdened with monthly payments. Credit card debt is often a particularly tough hole to dig out of; the average credit card interest rate is 27.81% as of January 2024.

33. Choose a debt repayment strategy

The sooner you make a plan to get out of debt, the sooner you can stash more money away in your savings account, emergency fund, and investments. If your budget allows, start paying down your high-interest debt like credit cards, personal loans, and car loans. Doing so can also help you improve your credit score.

But which loans should you tackle first? There are two popular approaches:

• The avalanche method is focused on paying off the debt with the highest interest rate because that higher rate costs you more money the longer you hold the loan.
• The snowball method is based on paying off your smallest balance first, then moving on to the next-highest balance, to give you a sense of momentum and accomplishment.  

34. Consider debt consolidation

Debt consolidation can be a useful strategy for managing and reducing your debt. It involves combining multiple debts into one, often with a lower interest rate, making it easier to manage and pay off. This method can help reduce your monthly payments and save you money on interest over time, enabling you to allocate more funds towards savings.

Set realistic savings goals

Your monthly budget is a plan for what you’ll do with your money. That includes covering necessities like rent, groceries, and utilities as well as discretionary purchases. But your budget isn’t only about spending; it’s also your plan for saving up. So when you’re planning how to allocate your income, be sure to budget for savings. 

In addition to asking how to save money, ask yourself why you want to save money. That’s how you determine your goals, and saving up can feel more achievable if you determine specific, realistic aims.

35. Establish an emergency fund

When the unexpected strikes, your emergency fund is there to cover expenses that you might otherwise have to put on a credit card or leave your budget squeezed. Keep your emergency fund in a savings account so it’s easy to access in the event of things like a big car repair, medical bill, or even covering living expenses in the event you’re laid off. 

Ideally, you’ll have enough money to cover six months of living expenses in your emergency savings. That may sound like a large sum, but if you put a little aside each month, you may be surprised at how quickly it adds up.

36. Plan for short-term goals

Think about what you want to save for in the next one to three years. Maybe it’s fun stuff, like a vacation, a new bike, or a gaming console. You might want to save for practical things, like replacing your aging car or moving into a bigger apartment. 

For each goal, figure out how much money you’ll need, how long you’ll save, and how much you’ll have to set aside each month to get there. 

37. Set medium-term goals

Saving for things three to five years in the future is also more achievable when you set specific goals; your motivation to keep saving may be stronger if you can picture what you’re going for. You might save for a downpayment on a house, remodel if you already own a home, or start a small business

38. Focus on long-term goals

When you think a decade or more into the future, goals might be harder to picture, but saving for them now can help you get there. Building up retirement savings and paying for your children’s college education are big targets, so focus on consistently saving a certain amount over time. When the far-off future arrives, you’ll be better prepared for it.  

Open a high-yield savings account

If you’re wondering how to save money more quickly, think about interest. When your money earns money, you add more to your nest egg without lifting a finger. The higher your savings account’s interest rate, the more your money will grow. And with compound interest, the interest you’ve earned also earns interest, so your savings grow even more rapidly. 

39. Check your current savings account interest rate

If you’re keeping a large amount of money in a basic savings account at a big bank, you could be missing out on some serious earning potential. In December 2023, the average national bank savings account interest rate was only 0.47%, and it was a meager 0.01% at the largest banks.

If you don’t know your current savings account interest rate, log into your dashboard or look at your latest bank statement. While you have your bank accounts pulled up, review your checking account to see if you’re being charged any pesky bank fees that could be hindering your ability to save money. 

Use a high-yield savings calculator to see if you could be earning more.

40. Switch to a high-yield account for better earnings

If your current savings account isn’t earning much, take 15 minutes today to sign up for a high-yield savings account. A high-yield savings account can help you reach your short-term savings goals and build your emergency fund faster. 

These accounts work just like regular savings accounts; some have minimum balance requirements or monthly fees, but many don’t. With the proliferation of online banks and credit unions, there are a growing number of options; some online banks offer high-yield savings accounts with annual percentage yields of 4% or more. 

Curious about other ways to put your idle cash to work? Learn more about this investment.

41. Automate transfers to your savings account

Saving up money is an exciting idea in theory; in practice, though, it can take a lot of discipline. That’s where automatic transfers come in. Setting up an automatic monthly transfer from your checking account to your savings account is an effortless way to make sure you don’t accidentally spend. 

Another option is to have your employer direct deposit a certain percentage of your paycheck into your savings account. As the old saying “out of sight, out of mind” goes, tucking away your funds before you see them will help to reduce the likelihood that you’ll spend all of your money each month.

Stop trying to keep up with the Joneses

Your college roommate is posting photos from another Caribbean vacation. Meanwhile, you’re clipping coupons and eating leftovers for lunch. When you compare your life to what everyone else around you seems to have, it can lead to anxiety and poor self-esteem. 

Trying to keep up with the Joneses can lead you to torpedo your financial plan, spend money on things you don’t really want, and even accrue unmanageable levels of debt. 

Learning how to save money isn’t just about the logistics of budgeting and adding to a bank account. It’s also about adopting a mindset that puts your financial priorities first:

42. Define your financial goals and values

Get clear about your money values and both the short-term and long-term financial goals you’re working toward. This clarity will help you stay focused on your priorities, rather than getting swayed by others’ spending habits.

When you see someone else splurging, picture the things you’re saving for. This mental imagery can act as a powerful motivator and reinforce your commitment to your financial objectives.

43. Limit your time on social media

Minimize your time on social media and unfollow accounts that make you feel envious or discouraged. Reducing exposure to ostentatious displays of wealth can help alleviate the pressure to conform to societal spending norms.

Associate with people who have similar values and personal finance goals. Being around individuals with comparable financial mindsets can help reinforce your saving habits and reduce the temptation to overspend.

44. Have a weekly money date

Make a weekly date with yourself to update your budget and check on your progress. Regularly monitoring your financial situation keeps you informed and motivated to achieve your set savings goals. If you have a partner or spouse, be sure to include them. Only if they know your household financial goals and the steps you’re taking to achieve them, can they make fully informed spending decisions with household dollars.

45. Celebrate your financial wins

When you achieve something, whether it’s hitting a set savings goal or coming in under budget on your groceries, celebrate your accomplishment. Acknowledging your successes, no matter how small, can boost your morale and keep you motivated on your savings journey.

Save and invest for the long haul with Stash

Once you get clear on your goals and figure out how to save money in ways that work for you, you may find yourself looking for more ways to work toward your long-term financial health. And that could include investing. 

If that sounds daunting, you’re not alone: 90% of Americans say they want to invest, but nearly half don’t know where to start. Stash makes it easy to begin putting your money into the market with automated investing and fractional shares that allow you to become an investor with as little as $5.

The sooner you start saving money and investing, the longer your money has to grow. Whatever methods you use to save, and no matter how small you start, taking the first step can set you on the course toward long-term success. 

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Frequently asked questions about how to save money

What is the 30-day rule?

The 30-day rule is a simple budgeting technique where you wait 30 days before making a non-essential purchase. If you need help controlling impulse purchases, this rule is a good one to use. It helps you determine whether the item is a true necessity.

How can I save $1000 fast?

To save $1,000 fast, consider cutting non-essential expenses, selling unused items, working extra shifts, or finding additional sources of income. Creating a budget and tracking expenses can also help you best save for your goals.

How can we save money in the current economy?

In the current economy, you can save money by reducing discretionary spending, shopping smarter with discounts and coupons, and prioritizing needs over wants. Consider refinancing high-interest loans and consolidating debt to further reduce expenses.

How can I save money with high inflation?

During high inflation, prioritize essential expenses, and cut back on non-essential spending. Consider buying store brands instead of name brands, and look for discounts and sales. Also, keep money in interest-bearing accounts to offset the impact of inflation.

Is it safe to keep money in the bank during inflation?

Yes, keeping money in the bank is generally safe during inflation due to the FDIC insurance protecting deposits up to $250,000 per depositor, per bank. However, the purchasing power of your money may decrease, so consider diversified investments to hedge against inflation.

The post How to Save Money: 45 Best Ways to Grow Your Savings appeared first on Stash Learn.

In this article, you’ll learn:

• Decoding investing: What you need to know first
• How to get started investing
• Why investing is important
• When you should start investing
• The difference between active vs. passive investing
• Common questions about investing

Decoding investing: What you need to know first

Investing – it’s a word that might conjure images of high-flying stock traders, complex charts, and confusing terminology. But at its core, investing is simply about putting your money to work for you in a way that earns more money over time.

Why Invest? The primary reason is to grow your wealth. Essentially, it involves looking out for your future self. Whether saving for retirement, a down payment on a house, or your child’s education, investing is one of the best ways to reach these financial goals. Unlike putting your money in a savings account, investing offers the potential for higher returns, albeit with some level of risk.

How to get started investing

Investing means buying securities (which is an investment), like stocks, bonds, mutual funds, and exchange-traded funds (ETFs), to make money as they grow in value over time. 

Investors generally create a portfolio made up of these various investments and often hold them for years or even decades. Traders, on the other hand, generally buy and sell investments rapidly to generate many small profits as prices rise and fall. 

If the idea of day trading makes you sweat, rest assured: investing is generally much simpler and less stressful. Remember that investing should be a marathon, not a sprint. Here’s how to get started.

1. Define your investment goals

Learning how to invest starts with a crucial step: defining your investment goals. It’s about understanding why you want to invest and what you hope to achieve. Are you saving for a comfortable retirement, a down payment on a house, or your child’s education? 

Defined goals help new investors stay focused and motivated, especially during market fluctuations. They act as a compass, guiding your investment decisions and helping you measure progress. Each goal will have a different time frame and risk profile. 

At Stash, we believe in the power of goal-oriented investing. It’s not just about growing your wealth but aligning your investments with your life’s objectives. When you have clear goals that matter to you, you can tailor your investment strategy to match them. 

2. Make sure you’re ready to invest

Before you start investing, you may want to first determine if you’re ready. Here are some indicators that the time may be right:

• Disposable income. If you can pay all your bills with a bit left over, it might be time to put your dollars to work. If you’re not currently budgeting, now is the perfect time to get started.
  >>Learn more: How to make a budget
• No high-interest debt. Let’s say you earn 5% on your investment, but you owe 18% interest on a credit card balance. That cancels out your return and then some, so paying down high-interest debt before you invest may be a good option.
  >>Learn more: How to get out of debt
• An emergency fund. Do you have three to six months of expenses in savings? If not, tying up all your extra cash in investments might force you to liquidate fast in case of an emergency, which may cause you to lose money on your investments.
  >>Learn more: How to start emergency and rainy-day funds
• Clear financial goals. Both investing and saving can be good ways to set aside money for the future; they each serve different functions. Setting goals and determining the right financial tools for meeting them lay a solid foundation.
  >>Learn more: How to create your financial plan

Even if you have $1,000 to invest, it may be better to put that money toward things like high-interest debt and an emergency fund if those aren’t in place yet. 

3. Set up your investment budget

If you’re ready to invest, the next step is to decide how much you can afford to invest. It doesn’t have to be a large sum; even small, regular contributions can grow significantly over time, thanks to compound interest. 

In fact, with many online brokers, you can often get started investing with as little money as a dollar. While shares of stock and other securities can be costly, many brokerages sell them by the slice via fractional shares. 

Once you start investing, you’ll likely want to keep adding money to your accounts, especially if you have long-term goals like retirement. Many experts recommend investing 10-20% of your income on an ongoing basis. But these are guidelines, not hard rules. 

The 50/30/20 budgeting method, for example, allocates around 20% of your budget to savings and investments. 

But for many people, investing 10-20% of your income might not be immediately practical. What matters most is starting early and investing consistently within your means. Even using a strategy like micro-investing can lead to significant growth. Use a compound interest calculator to see how your money could grow over time. 

>>Learn more: How much you should be investing

4. Choose the right investment account

The next pivotal step in your investing journey is opening an investment account, but it’s not just about picking any account. Your choice should be guided by the goals you’ve set. 

For instance, if you’re saving for retirement, you might choose a tax-advantaged individual retirement account (IRA). If you’re saving up for your future dream house, you might consider a standard brokerage account. 

There are several types of investment accounts to choose from. 

• Taxable brokerage accounts. A brokerage account allows you to buy and sell virtually any investment. Adults can also create custodial accounts for children.
  >>Learn more: How to open a brokerage account
• Employer-sponsored retirement plans. This category includes 401(k), 403(b), SEP Individual Retirement Accounts (IRAs), and SIMPLE IRAs. Many workplaces offer an employer match, which is essentially free money for your retirement.
  >>Learn more: Roth IRAs vs. 401(k)s
• Individual retirement accounts (IRAs). If you don’t have an employer-sponsored plan, or if you want to invest more, a traditional or Roth IRA can help you save for retirement and reap tax advantages.
  >>Learn more: Traditional vs. Roth IRAs
• 529 education savings plan. Saving for your child’s education? A 529 savings plan may offer flexibility and tax advantages.
  >>Learn more: Custodial accounts vs. 529 savings plans 

5. Think about your risk tolerance

All investment involves risk, including the risk that you could lose money. But how much risk each person is comfortable with is very personal. Your age, income, financial goals, and other factors play a role. Investors typically sort risk tolerance into three categories:

• Conservative. A conservative investor values stability over the potential for higher investment returns. Asset allocation is likely to be 40% stocks and 60% bonds.
• Moderate. Moderate investors aim to balance stability with higher reward potential. Typically, they allocate 60% to stocks and 40% to bonds.
• Aggressive. Aggressive investors feel comfortable taking big risks and hope to earn big rewards. They usually allocate 80% to stocks and 20% to bonds.

It’s vital to know your comfort level. Are you okay with high-risk, high-reward options, or do you prefer a safer, steady growth approach? Are you getting closer to retirement age, or do you have decades to go? Your risk tolerance will influence the types of investments you choose, balancing potential gains with the possibility of losses.

>>Learn more: Determine your risk profile  

6. Choose your investments

In this next step, you’ll choose investments based on your goals and risk tolerance. There are many types of stock market investments available; most everyday investors put their money in stocks, bonds, mutual funds, or ETFs. Cryptocurrency is also becoming a popular investment option, although it is a very risky investment. Additionally, you can even invest in real estate through a real estate investment trust (REIT).

For beginners, index funds and mutual funds can be a great way to start as they can offer built-in diversification and lower risk. Stash can guide you in choosing investments that match your financial objectives and risk profile.

The table above reflects general information on volatility and performance profiles. But there is tremendous variation within each investment type. Value stocks, for example, tend to be relatively stable, while “junk bonds” can be quite risky. That’s why it’s important to research stocks, funds, and any other investment options before investing.

>>Learn more: Different types of investments 

7. Decide your investment approach – DIY or robo-advisors

As you learn how to start investing, another critical decision you’ll make is whether to manage your investments yourself (DIY) or use a robo-advisor. Each approach has its benefits and considerations.

DIY investing allows you full control over your investment choices. You can select individual stocks, bonds, ETFs, and other assets based on your research and preferences.

It requires a commitment to learning about financial markets, investment strategies, and how to monitor your portfolio. It’s ideal for those who have a keen interest in financial markets and want to be actively involved in managing their investments.

Robo-advisors use algorithms to manage your investments based on your goals and risk tolerance. They automatically allocate your funds across various assets and rebalance your portfolio as needed.

Automated investing is great for beginners or those who prefer a hands-off approach. It eliminates the need for extensive market knowledge and ongoing portfolio management, saving you time and effort.

8. Monitor and adjust your investments

Once you’ve laid the groundwork and made your investment choices, you’re officially investing. You no longer have to figure out how to start because you’re doing the thing. 

But remember — investing isn’t a set-it-and-forget-it activity. Regularly review your investments to ensure they align with your goals and make adjustments as needed. Market conditions change, and so might your financial situation or goals. Consult a Certified Financial Planner for personalized advice on how to use investment funds to reach your financial goals.

When you first start investing, it can feel overwhelming. But it doesn’t have to be complicated to begin putting your money to work. The Stash Way® can help: it’s all about investing what you can afford on a regular basis, building a diversified portfolio, and investing for long-term growth. 

>>Learn more: How you can diversify your portfolio in 2024

Why is investing important? 

Many experts agree that investing is a critical component of a brighter financial future. About 61% of Americans own stock (Gallup, 2023), and many invest in other types of investments as well. Here are some of the most common reasons people invest:

• Retirement. In 2022, 72% of non-retired Americans had some retirement savings, and many put those dollars into investment accounts. Investing could help your nest egg grow faster than saving alone (Federal Reserve, 2023).
  >>Learn more: Calculate how much you’ll need to retire
• Combating inflation. Money loses buying power over time: an item that cost $100 in 1950 would cost over $1,276.64 today in 2023. Investing can be particularly important during inflationary times to preserve and grow the purchasing power of your money.
  >>Learn more: How to combat inflation
• Lowering tax burden. Retirement and college savings accounts offer tax advantages that could lower your taxable income, and some investment profits are taxed at the lower capital gains rate of 0-15%.
  >>Learn more: How taxes on stocks work
• Growing wealth through passive income. Investing puts your dollars to work for you. You might earn passive income through dividends, as well as returns when you sell securities that have increased in value.
  >>Learn more: Passive income streams 

How early should you start investing?

As a general rule, the sooner you start investing, the greater your earning potential. How? The power of compounding. 

Imagine you invest $100 and earn a 5% return annually. In the first year, you’d earn $5. When you re-invest those earnings, you’d earn interest on $105 the next year, for a return of $5.25. Every time your money makes money that you re-invest, it increases your balance, as well as the return on that balance. 

The longer your money compounds, the greater the effect. Let’s say you start with $100 and contribute $25 a month for 20 years, earning an average rate of 5%. After 20 years, you’d have deposited $6,100 and your balance would be over $10,000. And after 50 years, you’d have contributed $15,100 and your balance would be almost $64,000. 

The moral of the story is clear: there is no right age to start investing. But the earlier you begin, the more time your money has to grow. Think long-term and harness the power of compounding to build wealth.

>>Learn more: Calculate compounding over time

What’s the difference between active vs. passive investing?

In the world of investing, there’s a place for every kind of investor. Are you a hands-on or hands-off investor? Each approach comes with risks and benefits.

Hands-on, active investors tend to focus on short-term gains; they usually spend substantial time maintaining their portfolios and trade more frequently. Active investors may also try to beat the stock market by choosing specific stocks that may outperform leading indexes like the S&P 500. 

But even professional fund managers don’t beat the market reliably. Active investing can be a higher risk and involve more account fees due to the frequency of trading. 

Passive, hands-off investors usually practice a buy-and-hold investing strategy: they hold their investments for long periods of time, seeking a long-term return. They frequently invest in index funds that aim to mimic the performance of the market overall and keep them for a long time. 

Passive investing is often recommended for long-term goals like building wealth for retirement. Even Warren Buffett, one of the most successful investors, emphasizes the importance of long-term, value-driven investing strategies.

>>Learn more: How passive investing works  

Common Questions About Investing

Is investing in the stock market risky?

Investing in stocks always involves risk. While you can make money by investing in stocks, bonds, funds, and other securities, you can also lose money, especially if your investments lose value. It’s a good idea to diversify and do careful research before you purchase securities, so you can reduce your risk.

How do I invest money in the stock market?

You can invest in the stock market by purchasing stocks, bonds, mutual funds, and exchange-traded funds (ETFs), as well as other securities. You can make these purchases by setting up an investment account with a brokerage, either online or through an investment app. Use the steps in this article to learn how to start investing.

How much money do you need to invest in stocks?

You may think you need a large sum of money to start investing in order to buy pricey stocks or other investments. But you can crack into the investing world with as little as $1 thanks to fractional shares. As their name implies, these are fractions of full shares that can help you start investing, sometimes with just a few dollars.

Is $100 enough to start investing?

Absolutely, $100 is enough to start investing. Many online brokers and robo-advisors offer low or no minimum investment requirements, making it accessible for beginners. Also, options like fractional shares allow you to invest in high-value stocks with smaller amounts of money. Starting with what you have, even if it’s $100, is a great step towards building your investment portfolio.

What is the difference between trading and investing?

Trading is the process of buying and selling individual stocks, which usually takes place over the short term. Investing generally implies buying stocks or bonds and holding onto them over a longer period of time. 

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The post How to Start Investing: A Comprehensive Guide for Beginners appeared first on Stash Learn.

It’s called an “individual” retirement account (IRA) because you, as an individual, set up and manage it on your own. It’s not something your employer handles for you, like a work-related retirement plan. 

But what exactly is a traditional IRA, and how does it work? Let’s find out.

In this article, we’ll cover:

• What a traditional IRA is
• How traditional IRAs work
• Traditional IRAs vs other IRAs
• Pros and cons of traditional IRAs
• How to open a traditional IRA account

What is a traditional IRA?

A traditional IRA is a type of retirement account that offers tax advantages. When you contribute money, you’re often able to deduct that amount from your income taxes. This helps to lower your taxable income for the year.

For example, if you earn $50,000 a year and contribute $6,500 to a traditional IRA, your taxable income would be $43,500. This can potentially save you money on your tax bill. 

A traditional IRA is best if:

• You want to lower your taxable income now
• You expect to be in a lower tax bracket in retirement

How traditional IRAs work

Anyone with earned income can contribute to a traditional IRA—there are no income restrictions. You can open a traditional IRA with Stash, your bank, or any other brokerage firm. 

When you put money into a traditional IRA, it’s not just sitting there idly. You get to decide how to invest it. You can invest IRA funds in various ways, like stocks, bonds, exchange-traded funds (ETFs), and other securities. 

The money inside a traditional IRA grows tax-deferred. This means you won’t pay taxes on it until you withdraw the money in retirement. Over the long term, this tax-deferred growth can help you build wealth.

Contribution limits

The annual contribution limit to a traditional IRA is $6,500 as of 2023. If you’re 50 or older, you may make an additional $1,000 catch-up contribution, for a total of $7,500 annually. 

There are two caveats, though:

1. If you earn less than the current year contribution limit, you can only contribute up to the total of your taxable income for the year. So if your taxable income is $3,000, your cap is $3,000.
2. This limit applies to traditional and Roth IRAs combined. So if you have both accounts, your total contribution cannot go over this limit. 

Tax deduction

Traditional IRA contributions are made with pre-tax dollars, so you can get an immediate tax benefit by deducting them from your taxable income for the year. Doing so might put you in a lower tax bracket or make you eligible for certain tax incentives. 

If you don’t have an employer-sponsored retirement plan, like a 401(k) or 403(b), you can deduct the entire amount you’ve contributed for the year. However, if you or your spouse participate in an employer plan, you might not be able to deduct the full amount. 

The IRS sets deduction limits based on your filing status and modified adjusted gross income (MAGI). If you’re single and have a workplace plan, your MAGI must be below $83,000 to receive at least a partial deduction. If you’re married and filing jointly, you must earn less than $136,000. This income limit applies even if your spouse has a workplace plan, but you don’t. 

Age limits

Before 2020, you couldn’t contribute to a traditional IRA past age 70½. But now, there is no age limit. Anyone with earned income can contribute to a traditional IRA. This change was due to the SECURE Act, which went into effect on January 1, 2020. 

Early withdrawal rules

Generally, you can start taking funds out of your traditional IRA when you turn 59½, and you’ll pay regular income tax when you make withdrawals. 

If you take out money early, however, you’ll usually have to pay a 10% penalty on top of income tax. There are a few exceptions to the IRA early withdrawal rule, including:

• Becoming totally and permanently disabled
• Paying for certain higher education expenses
• Buying your first home, up to $10,000
• Paying health insurance premiums while unemployed
• Taking substantially equal periodic payments (SEPPs) for at least five years or until you turn 59½, whichever comes later

Check out IRS Publication 590-B for important information on these and other exceptions.

Required minimum distributions (RMDs)

Once you reach the age of 72, you’re generally required to start taking withdrawals from your traditional IRA each year (73 if you reach age 72 after Dec. 31, 2022).  These withdrawals are called required minimum distributions (RMDs), and they’re based on your life expectancy and IRA account balance.

If you don’t take RMDs, you could pay a hefty excise tax of up to 50% of the amount you were supposed to withdraw. So make sure you plan ahead and take your RMDs on time.

Pros and cons of contributing to a traditional IRA

Traditional IRA benefits

An IRA of any kind can help you put away money for retirement and possibly enjoy tax advantages. The particular benefits of the traditional IRA include:

• Your tax-deductible contributions can lower your taxable income for the year, and may even drop you into a lower tax bracket. 
• You pay no taxes on funds while they’re invested, meaning there’s more money in the account to compound over time.
• If you’re in a lower tax bracket when you make withdrawals than when you made contributions, you may pay less tax on your money overall.  
• You can invest in the stock market through a wide variety of securities, including stocks, mutual funds, and ETFs.
• There’s no income limit; you can put money into a traditional IRA no matter how much you make. 
• Some exceptions allow you to avoid the early distribution penalty. 

Disadvantages of traditional IRAs

Depending on your circumstances, there may be some downsides to a traditional IRA compared to other types of IRAs, including:

• Withdrawing before you reach 59½ years of age may result in a 10% penalty
• There are yearly limits on how much you can contribute
• You must take required minimum distributions after age 72
• Possible limits on tax deductions if you or your spouse have an employer-sponsored retirement plan

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How traditional IRAs differ from other IRAs

There are several different types of IRAs, both for individuals and employees. The terms of each differ based on eligibility, contribution limit, income limit, tax treatment, and a few other factors. The comparison chart below reflects information as of 2023 for four common types of IRAs.

Roth IRA

A Roth IRA is similar to a traditional IRA in many ways: it’s an individual retirement account that offers tax advantages as long as you leave your money in it until you turn 59½. The main difference between a traditional and a Roth IRA is when the money is taxed. When you start a Roth IRA, you pay income tax on money before you invest it. Then, when you make qualified withdrawals, you don’t pay any income tax at all, including on the money your account has earned. You’re also allowed to withdraw funds you’ve contributed at any time without penalty, though you’ll be subject to a 10% penalty if you withdraw earnings early.

A Roth IRA is best if:

• You want tax-free income in retirement
• You believe your tax rate will be higher in the future

SIMPLE IRA

The Savings Incentive Match Plan for Employees, or SIMPLE IRA, allows an employer to set up traditional IRAs for their employees; both the employer and employee can make contributions. It’s generally available for small businesses with fewer than 100 employees that don’t have another retirement savings plan, like a 401(k). If your employer offers a SIMPLE IRA, they’re required to contribute a certain amount each year, but you don’t have to put in any money. 

A SIMPLE IRA is best if:

• You’re a small business owner or work for a small business and want an uncomplicated way to save for retirement.

SEP IRA

The Simplified Employee Pension Plan, or SEP IRA, is a retirement account that can be established by either an employer or a self-employed person. Unlike the SIMPLE IRA, only an employer can contribute to a SEP IRA. The employer is allowed to take a tax deduction for contributions made, and they must contribute equally to all eligible employees. Note: if you’re self-employed, you are considered the employer, so you can make contributions and take tax deductions.  

A SEP IRA is best if:

• You’re self-employed or own a small business and want a simplified way to save for retirement while potentially contributing more than traditional IRA limits.

Rollover IRAs

If you have an employer-sponsored retirement plan and leave your job, you can usually do what’s called a rollover, in which you transfer the funds into an IRA. Most people are eligible to roll over funds into either a traditional or Roth IRA, but there can be tax implications if you’re rolling over pre-tax money into a Roth IRA. If you’re trying to decide what to do with your 401(k) or 403(b), you may want to brush up on the IRS rules for rollovers.  

A rollover IRA is best if:

• You’re leaving a job and want to consolidate your retirement savings from an employer-sponsored plan.

How to open a traditional IRA account

To get started with your very own IRA, follow these key steps:

Pick the right IRA provider

The first step to opening a traditional IRA is to pick a reliable provider. Research different options, like banks, online brokers, or Stash IRAs. Choose a provider that suits your investment needs and preferences.

Open your account

Once you’ve chosen a provider, complete the online application process to open the account. This usually takes 15 to 20 minutes, during which, you’ll be asked to give your name, address, and Social Security number to verify your identity.

Choose your contribution amount

Decide how much money you want to put into your IRA each year. The max contribution limit for 2023 is $6,500 or $7,500 if you’re at least 50. 

Select your investments

In a traditional IRA, you can invest in a variety of assets like stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Research and choose investments that suit your risk tolerance and financial goals. Stash has automatic investing tools to help you build wealth regularly. 

Monitor and adjust

Review your account’s performance and make adjustments as needed. This might mean rebalancing your investments or changing your contribution amounts. 

Use a retirement calculator to determine how much you’ll need to save for retirement based on your age and desired retirement income. This will help you set a realistic savings goal and plan for a comfortable retirement.

Is a traditional IRA right for you? 

The sooner you start investing for the future, the more time your money has to grow. When you’re deciding whether a traditional IRA is the right choice for you, you might consider things like:

• Flexibility: Are you able to leave your funds in your account until retirement age to avoid incurring penalties? 
• Tax deductions: Do you want to lower your tax bill now or pay less tax in the future?
• Income limits: Do you have a higher income level that might disqualify you from opening a Roth IRA?

When it comes to tax-advantaged individual retirement accounts, people are often weighing the pros and cons of a traditional IRA vs. a Roth IRA. Good news: you can have both.

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Frequently asked questions

1. What are the annual contribution limits for a traditional IRA?

In 2023, the maximum you can contribute is $6,500 or $7,500 if you’re 50 years or older. It’s essential to stick to these limits; there may be penalties if you go over them.

2. What happens if I contribute more than the annual limit to a traditional IRA?

If you contribute more than the annual limit to a traditional IRA, you might face a penalty of 6% on the excess amount every year until it’s corrected. This penalty can add up quickly, so if you accidentally over-contribute, correct it as soon as possible.

3. Can I have both a traditional IRA and a 401(k) plan?

Yes, you can contribute to both a traditional IRA and a 401(k) in the same year. However, your ability to deduct your traditional IRA contributions from your taxable income may be limited if you or your spouse is covered by a workplace retirement plan.

4. Should you contribute to a traditional IRA if it’s not tax-deductible?

Even if you can’t deduct your IRA contributions from your tax return, it might still be worth it to contribute. The primary reason is that you can still grow potential earnings tax deferred. But if you’re looking for alternatives, consider opening a Roth IRA or increasing contributions to your 401(k), especially if you have access to an employer match. 

5. What happens to a traditional IRA when you die?

Your traditional IRA will pass to your designated beneficiaries when you die. They will have the option to take account distributions over their lifetime or as a lump sum. If you don’t designate a beneficiary, your traditional IRA will go through probate, which can be a lengthy and expensive process.

6. Who cannot open a traditional IRA?

Individuals who don’t have earned income, like wages, salaries, or self-employment income, cannot open a traditional IRA. One exception is if you’re married and your spouse works. In this case, your spouse can contribute to a traditional IRA on your behalf when you file a joint tax return. This is known as a spousal IRA contribution.

The post What Is a Traditional IRA? appeared first on Stash Learn.