4 Steps to Cultivate the Habit of Saving Money (2024)

Even though unemployment is down, and wage growth is up, statistical measures tracking the saving behavior of Americans haven’t improved much. A 2018 survey conducted by Bankrate found that 19% of Americans report not saving anything whatsoever, and another 21% save less than 5% of their income.

These numbers are alarming because if you want to retire comfortably, financial planners advise saving at least 15% of your income consistently for several decades (depending on how long you expect to live). In the Bankrate survey, only 16% of participants reported saving more than 15%.

The news is discouraging but not surprising. The results are just the latest in a decade-long trend of insufficient saving by Americans. As I have written before, saving money is difficult, while spending in an undisciplined way is gratifying. Many people set lofty goals to save money, say for a wedding or a down-payment on a house, fail to reach them, then feel dispirited and give up. Saving money regularly by making it part of your lifestyle is far more effective.

This is easier said than done. If you already have a saving-oriented lifestyle, that’s great. But for the majority who don’t save habitually, how are they supposed to cultivate the habit of saving money?

In this blog post, I want to suggest a four-step approach to cultivate the habit of saving money eventually adopting a saving lifestyle.

1. Start with a specific saving goal of building an emergency fund.

Popular widely-followed personal finance experts like Suze Orman, Clark Howard, and Dave Ramsey all have the same advice for starting off. Choose and then achieve the goal of saving a specific amount of money for emergencies. For instance, Dave Ramsey’s first baby step is to save $1,000 while Suze Orman recommends a higher target, saving enough money for eight months of living expenses.

While this tip seems counter-intuitive – after all, isn’t a goal diametrically different from a habit? – in reality, forming and achieving specific goals is a crucial early step in habit formation. People can only form new habits when they have adopted particular behavior patterns. To begin, there must be some underlying motivation to behave. Remember how you learned to drive a car. In the beginning, you had a focused goal of passing the driving test which drove you to learn driving.

2. Save something every single day, even if it is just a dollar or two.

To form a robust habit, the targeted behavior must be repeated regularly, keeping the context constant. Actively saving money every single day, even if it's only a couple of dollars, is crucial to forming a saving habit. As social psychologists Wendy Wood and Dennis Rünger explain in their excellent review chapter about research on the Psychology of Habit:

“Habits strengthen through associative and reward-learning mechanisms that capture the slow, incremental nature of habit formation. With each repetition, small changes occur in the cognitive and neural mechanisms associated with procedural memory. Through Hebbian learning of repeated connections, cognitive associations between context cues and a response are strengthened gradually so that people are prepared to repeat performance when the context cues are encountered again.”

This tip goes against the advice of many experts to automate savings, but the truth is if you want to form a saving habit, you have to take your financial decisions into your own hands.

3. Make your savings visible.

While the first two tips are about the process of forming a saving habit, the next two tips are about supporting the newly-forming habit.

Research shows that the key to having a resilient habit is to make both habitual actions and resulting rewards visible and tangible. When a teenager is learning to drive, the autonomy, the flexibility and the improvement in lifestyle are top of mind and encourage persistence. Similarly, saving visibly and seeing savings accumulate, whether it is in a glass jar or in an online savings account every day supports habit formation. Visible signs of progress provide positive feedback and encourage the individual to continue.

4. Regardless of your income, consistently spend less than you make.

The final tip seems obvious but is the most difficult one of the four. The main reason people are not able to save money is that they do not have control over their spending. If you want to form a saving habit, you must consistently spend less than you make. How to do this is a challenging issue that deserves its own blog post, but the requirement that you pay attention to your spending, and enact ways to curb it and bring it in line with your income, is critical. Research has shown that people with a strong saving habit are frugal and find spending money to be painful. Cultivating a saving mindset and habit requires abandoning a spending mindset.

There you have it. These are the four steps to cultivate a saving habit: Set an emergency fund goal, save money every day, do so in a visible and tangible way, and monitor spending to bring it below the level of your income.