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How To Save Money: 10 Research-Backed Tips That Actually Work

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If you’re expecting to read money saving tips like bringing your lunch to work, making your own coffee and buying generic brands, you’ve come to the wrong place.

It’s not that these actions don’t save you money. They do.

It’s that 99% of people already know these tips, yet still struggle to save more money.

In this article, you’ll find a completely different perspective on how to save money. 

It’s advice that’s backed by data and rooted in human behavior and psychology. Research has proven these strategies to be effective at helping people keep more money in their bank accounts. 

So whether you’re struggling with debt or looking to ramp up your savings for early retirement, you’ll get a lot of value from this post.

Tip #1: Focus On The Big Three (Housing, Transportation and Education)

Did You Know: TD Ameritrade did a study to attempt to figure out how some households are able to save 20% or more of their income. It turns out, the single biggest factor is how much they spend on housing. The Super Savers, as the study calls them, spend just 14% of their income on housing while the average household spends 23%.

Not only are houses, cars and education the largest line items in your budget, they’re often financed with debt. 

While using debt isn’t bad in and of itself, there are two key debt-related issues to be aware of:

  1. We’re bad at predicting whether we can actually afford something. In what’s known as optimism bias, people tend to overestimate the likelihood of positive events (such as a future salary increase) while underestimating the likelihood of experiencing a negative event (like a car breaking down). 
  2. We often confuse what a lender tells us we qualify for with what we can afford. When a lender says you can get a $300,000 house or a $50,000 car, those figures are based on a formula that identifies the largest amount of debt you can manage with a reasonable chance of paying it back. Why? Because that’s what’s most profitable for them. Your goal should be to take on only the amount of debt you can comfortably afford based on your financial situation. 

Do This: Measure your current expenses against the 50/30/20 budget, which says to allocate 50% of your income for needs, 30% for wants and 20% for savings/financial goals. This will tell you which areas of your finances are out of balance, and thus which ones you should focus on first. 

Tip #2: Track Your Money + Nudge Yourself Towards Good Decisions

Did You Know: In one of the largest ever studies of millionaires’ financial habits, researchers found that more than half still maintain a budget.

There are dozens of free apps that automatically track your income and expenses. These apps come in handy, as you can log in every so often to check on recent transactions and balances. 

But what’s interesting is that by using these apps a certain way, some users were able to save more than others.

What were the successful users doing differently from everyone else?

In researching for his book Willpower, Florida State University professor of psychology Roy Baumeister found that users who set budgets and goals saved the most:

“[…] spending was further tempered if they used the information to set up budgets and goals […]. The biggest effects were observed in people’s spending on groceries, restaurants, and credit card finance charges.”

How most apps work is that you’ll set a goal or determine a budget for a specific category. As an example, say you set a budget for $500 this month on groceries. An app can then automatically categorize your grocery expenses. More importantly, it can provide notifications throughout the month on how you’re doing. 

The notifications are key. Richard Thaler, a Nobel Prize winner and professor of behavioral science and economics at the University of Chicago, would define these notifications as nudges. This nudge helps you think twice about your actions and reminds you about the goals you’ve set. 

Do This: First, track your spending via one of the many free personal finance apps. My favorite free app is Truebill, because of its clean interface and ease of use. But don’t stop there; set budgets and alerts to help nudge you into making good choices. 

Tip #3: Build a $500+ Emergency Fund

Did You Know: Low-income families with $500 or more in an emergency fund were less likely to experience financial and psychological problems than moderate-income families with less than $500?

There are many benefits to having an emergency fund, which you can use to help pay for the all-too-common unplanned expense. 

The biggest benefit, however, is what an emergency fund can help prevent: high-interest debt. It’s this type of debt, often in the form of payday loans and credit cards, that’s especially hard to get out of.

The Federal Reserve found $500 to be the magic number in helping people experience less financial and emotional difficulties. While you’ll want to save more than that one day, $500 is a great goal to start with.

If you feel there’s not an extra dollar to set aside this month, try the proven technique of paying yourself first. On the day after your paycheck arrives, set up an automatic transfer from your checking to your savings account — even if the amount is only $25 this month. Ideally, you won’t even notice the money is missing. 

Pro Tip: Another feature that most popular budgeting apps have is the ability to notify you when your balance is low. Use this to make sure you don’t incur any overdraft charges. 

I prefer to have my checking and savings accounts at different banks. This makes it slightly harder to transfer money from my savings to checking, which can make all the difference. My favorite bank for holding an emergency fund, due to consistently having one of the highest interest rates on the market, is CIT Bank

Do This: Set up a savings account specifically to hold your emergency fund. (We recommend CIT Bank). Then, set up an automatic transfer from your checking account to the bank.

Tip #4: Create A Plan To Pay Off Your Debt ASAP

“He who understands interest earns it. He who doesn’t understand interest pays it.”

— An unknown ad copywriter

A lot of our financial success — or lack thereof — comes down to compound interest. If you save and invest your money correctly, it will go to work on your behalf. 

Have a lot of debt? That debt is working hard too. Unfortunately, it’s working very hard against you. So saving money comes down to eliminating that debt as fast as possible

As an example, let’s say you have $6,000 in credit card debt with an average interest rate of 18% and a $240 minimum monthly payment. 

Payment AmountTotal Interest PaidMonths to PayoffYou Save

Paying $100 more than the minimum payment saves you $554 over the next two years. Paying $300 more saves you $963 in just 13 months. 

Do This: If you have high-interest debt, such as credit card debt, start rolling a debt snowball. This is where you list your debts in order from smallest to largest balance, and focus on paying off the debt with the smallest balance first. This is the method research has shown to have the highest likelihood of success

Tip #5: Know When To Refinance Your Home

Did You Know: The Journal of Financial Economics found that homeowners in the U.S. missed out on over $5.4 billion in savings by not refinancing their mortgages.

Focusing on big expenses, and on housing in particular, was the main difference between the average person and those who were able to save more than 20% of their income every month. 

For many reasons, not everyone can pick up and move to a lower cost of living situation. But one thing many homeowners can do is reduce their housing costs by refinancing their mortgage to a lower rate. 

A rule of thumb to consider when evaluating whether to refinance is this: 

If you can reduce your mortgage rate by three-quarters of a point — going from 4% to 3.25%, for example — then it’s usually a good idea.

For comparing rates, we recommend Figure Mortgage Refinance. I’m a customer of Figure myself and was very impressed with their streamlined, paperless process. From start to finish, the entire application is 100% online — which allows you to refinance in a matter of weeks, not months. 

Figure performs an initial soft credit pull to provide you rates and terms So, checking rates won’t hurt your credit score, in which a minimum of 620 is needed for approval.

If you have equity in your home, Figure gives you the option to cash out right now. Their cash-out refinance option allows you to withdraw up to $500K in equity from your home. Terms and conditions apply.

Do This: Check with Figure to see if you could potentially reduce your mortgage rate.

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Tip #6: Track Your Financial Freedom Date

In a study published in the Journal of Financial Planning, researchers provided financial psychology techniques with the aim of increasing participants’ savings rates. In the end, participants increased their savings rate by an average of 10% to 17%.

What “tips” did the researchers provide? There was no mention of cutting out lattes or bringing your lunch to work. Instead, the techniques focused on financial goal setting. 

The main themes were:

  • Setting three financial goals: Finding three financial goals that would rank at least a nine of 10 on the excitement scale. 
  • Naming: Participants were instructed to name their financial goals something exciting. For instance, instead of “retirement,” they would opt for something like “financial freedom by 50.”
  • Time-stamping: Giving each goal a specified end date.
  • Visualization: Using poster boards and magazines to create a dream board of their financial goals.

When I read this study, I couldn’t help but think of the Financial Independence Retire Early movement — often referred to in personal finance circles simply as FIRE. 

If you’re unfamiliar with FIRE, the idea is to save a large percentage of your income — we’re talking in the 30% to 80% range — so that you can retire early.

The FIRE community has its own language. You’ll ask someone what their number is, and they’ll say something like “48.” This number represents the age at which their investments will be able to sustain their current standard of living for the rest of their lives. 

For me, it’s this focus on the very exciting goal of early retirement that helps explain why so many people in the financial independence community are able to change their situations for the better.

Of course, for many people, mountains of debt mean the idea of retiring early is the last thing on their minds. 

I think the concept is still powerful in cases such as those. 

For example, when you’re struggling with debt one effective tactic can be to track the date you’ll become debt-free.

In fact, I find this concept so powerful that I created a free Google Sheet (link goes to the instructions for how to use it) that allows you to determine exactly when you’ll become debt-free based on your current situation. 

All you have to do is input some top-level financial information, like your income and monthly credit card bills. Then the calculator shows you the exact number of months it will take you to pay everything off. You can then update the spreadsheet each month, with the goal of improving your number.

Do This: If you have high-interest debt, use our free debt payoff spreadsheet to calculate your debt-free date. 

If you’re currently investing for retirement, make it a point to track the age at which you can become financially free. Here are our three favorite (free) early retirement calculators to help.

If you want to learn more about setting financial goals, we have a free workbook that walks you step-by-step through the entire process:

Tip #7: Save More For Tomorrow, Tomorrow

Research Shows: In a 2004 academic study, participants who committed in advance to saving a portion of their future salary increases ended up saving more than three times the amount as those who didn’t.

It’s easy to think of an excuse for why you can’t save more this month. But do you know what’s also pretty easy? Making a commitment today to save more money in the future — e.g., a year from now.

In the study mentioned above, behavioral finance researchers Richard Thaler of the University of Chicago and Shlomo Benartzi of the University of California found some surprising results:

  • 78% of participants agreed to save a portion of their future raises.
  • Of the participants, 80% remained in the program after their fourth pay raise.
  • The average saving rate of participants increased from 3.5% to 13.6% over the course of 40 months.

Do This: Check to see if your employer-sponsored saving plan has automatic escalation. This is a newer feature that allows you to automatically increase your 401(k) contributions based on parameters you set. For example, you can automatically increase your savings rate by X% every 12 months.

If your plan doesn’t have this feature, consider these two options:

  1. Commit to increasing your savings rate every time you get a raise.
  2. Set a calendar reminder to increase your contribution percentage to your employer-sponsored plan by 1% every quarter. Yes, it’s a small number, but that’s the entire goal — you won’t even realize the money is missing from your paycheck. 

Tip #8: Make More Money

Research Shows: Most lower-wage households spend close to or above 100% of their income on necessities (not wants), including debt payments.

One of the largest underlying issues for many households not being able to save is the fact that 100% of their income goes towards paying for basic needs. 

Therefore, focusing on saving money reaches a point of diminishing returns.

In other words, once you’ve developed the best practices and behaviors of frugality, there are fewer and fewer opportunities to save. More so, saving an extra $50 might come at a high cost, such as spending an extra hour per day commuting by taking the bus instead of driving to work. 

For this reason, one of my favorite money-saving strategies is actually earning more money.

Do This: Your own situation and skills will determine the best method for increasing your income. Here on the blog, we have a number of helpful lists and guides to help you get started:

Tip #9: Buy The Cheap Type Of Life Insurance (Term)

Did You Know: Consumers believe life insurance costs three times more than it actually does (source).

Many people are surprised to learn that life insurance can be cheap. There are a few reasons for this, but one is that most of us know someone who bought an expensive policy from a friend or family member and now struggles to make the payment. 

Too often, what that friend or family member sold them was the wrong type of life insurance in the first place.

There are two general types of life insurance: term and whole life. 

Term insurance has a fixed payment for a limited period of time. For example, a term policy might cover you for $1 million for 20 years at a fixed price of $20 per month. It’s that simple.

Whole life insurance is complex. And with complexity comes more fees, complicated language, and 100+ pages of disclaimers. In the end, whole life really only makes sense for higher-net-worth individuals trying to accomplish complicated tax-saving strategies.

Another misconception when it comes to life insurance is the difficulty of purchasing a policy. 

Until recently, purchasing life insurance often required filling out paperwork and going through a medical examination. Thankfully, that’s now changed as a result of online companies like Bestow

With Bestow you can apply for $1 million in term life insurance coverage in under five minutes, all through their website.

And getting a quote takes seconds, as they let you see estimated rates up-front. 

Related: The Beginner’s Guide to Buying Life Insurance Online.

Tip #10: Create A “To Buy” Waiting List

Did You Know: In one study, participants who told themselves “not now, but laterwere less likely to splurge on a chocolate cake in the minutes, hours and days ahead.

Instead of declaring that you’ll never make an unnecessary purchase again — a totally unrealistic goal, since we all give in to our impulses occasionally — give yourself permission to dream by saying “not now, but later.” 

Whether it’s to eat a dessert or shop online, there’s nothing wrong with the impulse in itself. What gets you in trouble is when, 10 minutes later, your shopping cart is full or the order is placed without a second thought. 

Do This: When it comes to impulse purchases like this, what you can do is create a “to buy” list — a list of things you want to buy in the future. If an item is still on your list after 30 days, and you have the money, give yourself permission to buy it. 

What’s fascinating about “to buy” lists is that not only do they reduce impulse purchases, research has shown that they eliminate the urge to buy something altogether.

Roy Baumeister, the leading willpower researcher we mentioned earlier, explains:

“[…] telling yourself I can have this later operates in the mind a bit like having it now. It satisfies the craving to some degree.”

Final Thoughts on How to Save Money

Most “money saving tips” articles are about what you can’t spend money on. 

No lattes, no eating out, skip brand-name items at the grocery store, forego that dream vacation and take a staycation instead — the list of simple ways to rein in your spending habits goes on and on.

And while these simple ways can in fact help you cut your living expenses, you already know these recommendations. 

But what you may not know is there’s a long line of research that shows that willpower is a limited resource. Telling yourself “no” over and over again can actually have harmful impacts across many different areas of your life.

That’s why it makes the most sense to focus on your “big three” areas first. Housing, transportation and education are where you’ll be able to save a lot of money as quickly as possible.

Plus, reducing your expenses in these categories means you won’t have to obsess over every penny in your monthly budget, constantly denying yourself life’s small pleasures in a never-ending quest to stop “overspending.”

Instead of going against proven behavior research, consider the smarter path. What you’ll come to find is that the techniques and strategies in this article are not only easy to implement but far more effective in helping you reach your financial and savings goals.

Our Favorite Financial Resources

  • Take control of your money with Truebill’s free budgeting tracker. Out of all the apps we’ve tested, it’s by far the cleanest and easiest-to-use.
  • Figure Home Refinance. With mortgage rates at historic lows, it’s a great time to refinance and save money. Thankfully, Figure makes refinancing your mortgage easier than ever. Figure offers a streamlined, paperless and 100% online application process that lets you refinance in a matter of weeks rather than months.
R.J. Weiss
R.J. Weiss is the founder and editor of The Ways To Wealth, a Certified Financial Planner™, husband and father of three. He's spent the last 10+ years writing about personal finance and has been featured in Forbes, Bloomberg, MSN Money, and other publications.

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