More Americans have bank accounts than ever before but that doesn’t necessarily indicate a higher savings rate than in years past. In fact, household savings rates are hovering at only about 1/3 of the all-time high, which was reached during a period in the 1970s. Currently, household savings are just above 6% of income.¹ However, that number can be a bit deceiving.

Like all averages, a small percentage of very high numbers tossed into the mix, like those for affluent households, can make the average household savings rate look much higher than what the typical household might see when they look at their savings account balance. In a research report from the Federal Reserve, nearly half of American households surveyed for the report could not afford a $400 financial emergency without using credit to help navigate the cash crunch.²

There are several reasons why you might want to build your savings, including saving for a specific item or a long-term goal, but the first focus should be on ensuring that you have ample savings to weather any small or midsize financial storms that may come your way. Insurance tends to be a better solution for larger financial risks because saving for a potential loss of tens or hundreds of thousands of dollars isn’t realistic for most households.

It all starts with a budget

One of the real keys to building your savings is to spend less than you make. That sounds simple enough but if it were that easy, we would all have tens of thousands of dollars saved and there would be no such thing as a financial emergency in households because we would all be well prepared.

Because spending less than you make isn’t always as easy as it sounds, building a budget — one that works now and will continue to work into the future — is often one of the most valuable tools you’ll have to help you build your savings.

You can think of your budget like a profit and loss statement in a business. The top line is your income from all sources. Beneath that, is the total of all your expenditures. Subtract your expenses from your income to get your “net profit”, the bottom line. If it’s a negative number, either you’re using credit or using up your savings. If it’s a positive number, this is the amount that you can save each month without making any changes at all.

In most cases, you’ll be able to identify your expenses by going through a few months of bank statements. However, if you use cash frequently, it will be beneficial to keep notes on your cash purchases to get a better idea of where your money is going and how much of it is being spent.

Beware of annual subscriptions or donations that are paid automatically on a quarterly, semiannual, or annual basis. These expenses can sometimes escape notice if you only look at a month or two of bank statements when building your budget and can create a “leak” in your budget. You’ll want to get the numbers as close as possible to avoid having an insufficient amount of money in your checking account if you plan on moving your savings to a separate account.

Identify frivolous spending

As part of the budgeting process, you need to identify frivolous expenses — and nearly every household has some. Often, there’s less flexibility in your larger fixed expenses, such as housing costs or auto payments. More accurately, there may be some ways to reduce costs in your larger expenses as well but this isn’t the low-hanging fruit; making meaningful changes in these areas will require a more detailed analysis or even significant lifestyle changes.

Often, the easiest way to recover money that you can then divert to your savings is to look at the small expenses first. These have a way of adding up quickly and you might be surprised at how much a gourmet coffee habit or a smoking habit can really cost. A $5 per day gourmet coffee habit costs $1,300 per year, assuming you only treat yourself on weekdays, and a pack-a-day smoking habit costs nearly $3,000 every year — and that’s in after-tax dollars. Chances are good that you needed to earn about 30% more than those amounts to finance either indulgence.

Budgeting doesn’t always mean you can’t have the things you enjoy. The goal of the process is to understand where your money is going and to establish your priorities. Maybe you can treat yourself to a coffee on Fridays and bring your coffee in a travel mug from home Monday through Thursday. That’s an 80% savings or an extra $1,040 you have available to save every year. Chances are good that you can think of something better to do with that thousand dollars than spend it on coffee.

The benefits of multiple bank accounts

Back in the old days, your parents or maybe your grandparents used “the envelope method” for saving and budgeting. One envelope might hold money for the mortgage or rent. Another envelope might hold money for groceries, while a third envelope might hold money for savings or an emergency fund. Most of our payments are made by checks or digital payments now but the envelope system is still a viable way to build your savings. However, you won’t need real envelopes. Instead, you can use multiple bank accounts or money market accounts.

The money you need for your standard living expenses can stay in your checking account. Money is allocated for savings, whether saving for a special item or to build an emergency fund, can go into a savings account, a money market account, or even a money market fund.

Much like the envelope system used in the past, the goal of having multiple bank accounts is to get your savings out of harm’s way. If all your money is in your checking account or the account associated with your debit card, it’s easier to spend it — even if accidentally. If you have to take extra steps to get to the money you’ve put away, you’ll think twice before spending it and in most cases may avoid spending it altogether.

Automate your savings (pay yourself first)

If you’re disciplined, you can move money over to your other accounts each week to begin building your savings. However, most of the account types you would use to hold your savings can be set up with automatic payments.

Let’s say that after you analyzed your budget you decided you had $200 per month that you could put into your savings. The easiest way to automate this is to schedule an automatic transfer to another account you’ve set up for savings whenever you get paid. Let’s say you get paid weekly. Contrary to popular belief, there aren’t four weeks in a month; there are 4.25 weeks in a month. You would take $200 divided by 4.25 and have that amount automatically transferred on payday every week.

This method is effective for getting your money into your savings account where it can’t be spent as easily and where it can continue to grow based on the interest rate for that account.

Before you decide to automatically transfer every spare dime you have, you may want to double check for automatic payments such as subscriptions, memberships, or protection plans. Many of these are not billed monthly and a $100 or $200 surprise can break your budget if you’re moving all your spare cash out of your checking account.

Consider your liquidity

In this case, liquidity simply refers to how quickly you can get at your money if you have an emergency. Savings accounts typically don’t have a penalty for withdrawing your money at any time. Money market accounts or money market funds typically pay a slightly higher interest rate but may have rules associated with how often you can withdraw from the account. Bank Certificates of Deposit (CDs), in particular, may not be the best place to save for an emergency fund because CDs charge a fee for early withdrawal. However, CDs can be useful for additional savings if your emergency fund is already established in another account where your money is easily accessible if needed.

Is it time to start a side gig?

If you’ve analyzed your budget and pared your expenses as low as you can go but there still isn’t much left for savings, the only other number that can change is your income. In the past, it was common to take on a part-time job for extra cash. However, now it is easier than ever to start a side gig offering goods or services on your own schedule. Whether cutting hair at people’s homes on weekends, or doing handyman services, or even offering online services like website design, you may find the additional flexibility available with running your own side gig preferable to taking on part-time work elsewhere.

There may also be an opportunity to earn more where you currently work. If you’ve proven yourself on the job, perhaps it’s time to ask for a raise. If your job pays overtime, maybe you can ask for some overtime hours as well. Most employers expect employees to ask for raises occasionally. The conversation, if handled professionally, shouldn’t be a surprise to your employer.

If you are already self-employed, it may be time to take a look at your rates to be sure you’re being paid what you’re worth. When we start out in any industry, it’s common to accept lower paying work until we prove ourselves and establish our expertise. However, many self-employed individuals don’t adjust their rates as their business grows, which can lead to not having enough money left over to build savings.

Invest your spare change?

Another way to start saving for the future is by investing. A number of apps are now available that offer to invest your “spare change”, money that you likely wouldn’t miss anyway — at least in theory. If you make a purchase for $31.26, for example, these apps can invest the remaining $0.74 to make an even dollar amount. While these apps offer convenience, they may not work well with a carefully-planned budget, particularly if you make a lot of purchases, with the “spare change” from each then being invested. Over the course of a month, this can add up to a substantial amount, enough to create a possible hole in your budget.

If you’re considering using spare change apps to build your savings through an investment account, do your homework on the fees for these apps when compared to a low-cost investment brokerage. It’s likely that you’ll find investing in a low-cost mutual fund will take a smaller bite out of your savings. Similar to bank accounts or money market funds, investment account contributions can often be automated. Knowing exactly how much you are investing each month makes balancing your budget much easier.

With the proper level of resolve, building your savings can be easier than you might think. One of the main keys to successfully building your savings is to avoid some of the common pitfalls (like running out of money due to a hole in your budget) that can cause people to give up the good fight. It also helps to visualize a goal. If you have a specific goal in mind for your savings, try to think about that goal when you drive past that $5 coffee shop on the way to work. Maybe it’s a vacation trip to a place you’ve always wanted to visit. Wouldn’t you rather have a vacation trip than the cup of coffee? Giving in to the temptation and stopping for that coffee is exactly how many budgets go off the rails; someone slips — and then slips again, and before you know it, the budget is busted.

The difference between “no” and “not yet”

The discipline you’ll need to build your savings requires an understanding that maybe you can’t have what you want right now, but that you can have something better later — if you stay disciplined. If you’re saving for your emergency fund, you’ll also have the comfort of knowing that you’ll be able to handle most of the curve balls that life might toss your way.

By automating your savings, you’re taking most of the work out of the process of saving. When saving is easy and the money is moved to another account before it can be spent on whatever it is that we spend money on, you’re more likely to stay with the process for the long run.

Endnotes

1. https://tradingeconomics.com/united-states/personal-savings

2. https://www.federalreserve.gov/2015-report-economic-well-being-us-households-201605.pdf