7 Steps to Saving Money In Personal Finance

Saving money can be as tough as sticking to a New Year’s resolution. You start out with the best intentions, but slowly lose steam over time. As time goes by, you forget to connect your day-to-day spending with its future consequences.

The daily decisions we make, though, have a huge impact on how much we save in the long term. If we can take control of our spending, then we can put ourselves on the path to financial security and independence.

This guide presents a 7-step strategy to help you manage your personal finances successfully. To start, let’s think about why it’s so challenging to save money. What exactly is standing in our way?


What Are the Biggest Roadblocks to Saving Money?

Saving money is challenging for both practical and psychological reasons. Spending money too freely in the present eats away at our savings. Failing to think about the future also stands in the way of our ability to put money away. Understanding these reasons will help you set goals and commit to them, so let’s consider both individually.


Roadblock #1: Daily Spending

In the practical sense, we need to spend a certain amount of our income on necessities, like food, rent, our phone bill, and student loans. Then we need to spend a little more on things like a gym membership, daily latte, or Netflix subscription. Everyone’s budget looks a little different, depending on his/her needs and lifestyle.

Everything we spend money on takes away from our savings. It’s our job to figure out what expenditures are worth the cost, and which ones sap more value than they bring. Once we figure this out, we can set specific goals for how to stop spending money.


Roadblock #2: Prioritizing “Right Now” Over the Future

Just as with New Year’s resolutions, psychological barriers also stand in the way of saving. Saving money, like exercising or dieting, requires that we change our habits. And change is almost always harder than staying the same.

Not only do old habits die hard, but ignoring the demands of the “instant gratification monkey” can also be an arduous exercise in self-control. It’s really tough to limit our desire for stuff.

Finally, saving money requires a forward-thinking perspective, which people possess to different degrees. Planning for a secure retirement 30 years from now can feel a lot less important than shopping for a new summer wardrobe this weekend.

The road to savings can be full of setbacks, but luckily, there’s an effective strategy you can use to clear the path. Before looking at each step of this strategy, let’s discuss what makes this particular 7-step strategy so effective for saving money.



Some money-saving strategies feel good in the moment, but they won’t give you significant results in the long term.


Saving Money: Real vs. “Feel Good” Strategies

Saving money can be challenging, and you need a realistic and clear plan to make it happen. Your plan shouldn’t just focus on dollars and cents, but it should also acknowledge the value that certain purchases bring to your life. With this acknowledgement, you can make a realistic assessment of which of your spending habits are worth keeping and which ones should be put aside.

Many websites tout basic “feel-good” strategies for saving money, like skipping your daily latte or splitting 2-ply toilet paper to get more bang for your buck (no thank you). These tiny changes don’t make much of an impact on your overall savings account, though – and they could seriously downgrade your quality of life!

Maybe that daily cappuccino fuels your productivity all day, and the toilet paper – well, its practical applications are obvious. These strategies target small expenses while ignoring other kinds of value, like the energy a morning coffee brings to your day.

My strategy, on the other hand, doesn’t ask you to reduce your quality of life substantially, and I don’t think that tiny money-savers are all that important. Instead, I ask you to look at more significant expenditures while at the same time considering how much value each one brings to your life.

As you’ll see below, step one of this 7-step plan asks you to do just that.



Follow these seven steps and you’ll have to upgrade to a bigger piggy bank.


7 Steps for Saving Money

These seven steps will empower you to take stock of your spending and save money in a way that actually works. They won’t ask you to give up habits that are important to your quality of life, nor do they target tiny expenses that aren’t making that big of a dent in your budget.

The first step asks you to look beyond small changes and instead figure out which areas of your life are eating away at potential savings.


Step 1: Gather Data on Your Major Areas of Spending

The first step to saving money is identifying your major spending categories. Tools like the budget-tracking Mint app and Excel are useful for listing out and comparing these categories.

Rather than considering each spending category equally, you should pick out the four or five biggest ones. Typically, big areas include rent, groceries, transportation, and restaurants.

By the way, when I analyze my spending, I generally just look at my bank account, rather than at my credit card transactions. My credit cards have hundreds of transactions, but many are small, like a 50 cent pack of gum or a $1.00 soft drink.

My checking account, though, shows big withdrawals, like rent. It has fewer transactions, but it captures more dollar volume. For the most part, therefore, I focus on my bank account to pick out my biggest spend categories.

Your categories might look entirely different from mine, of course. This first step’s value lies in its capacity to customize to the individual. You can identify your personal biggest spend categories as a first step to saving money effectively.



The Utility Method helps you evaluate your purchases according to how much happiness they bring you.


Step 2: Use the Utility Method on Each Category

Once you have your biggest spend categories picked out, it’s time to think about the value of each expense. Value is tough to quantify, but trying to do so can help you make logical choices about your spending.

I use a method that, while not perfect, is a good starting point for assessing my expenses. For each purchase, I think about how much joy it brings to me and how long that joy lasts. To put this in concrete terms, I think about what I buy in terms of “units of joy.”

For example, eating out a restaurant versus staying at home might bring me one unit of joy. My meal lasts two hours, so I multiply this one unit of joy by two. Overall, my restaurant experience has a value of 2 “units of utility.”

Using this same method for a cup of coffee, I might also say that my coffee brings me one unit of joy. This joy just lasts 0.25 hours, resulting in a total of 0.25 units of utility.

Not only does this method help me compare experiences by time, but it also helps me differentiate by how much enjoyment I get from different experiences with similar costs. For instance, a $300 vacation to Atlantic City might bring me 20 units of utility, while a $300 (overpriced) dinner might only bring me 4 units of utility. Same price, but a much different value overall.

While this system may feel unnatural at first, it’s a useful metric for comparing and contrasting your spend categories not just by amount of money they cost, but also by the amount of value they bring to your life.

Step 2 in this seven-step strategy is to use this Utility Method (or any other reasonable method that lends a certain sense of objective analysis) to each of your major spend categories. Figure out the value each expense brings to your life, and quantify it in a way that makes sense to you.



Saving money doesn’t have to make you miserable! You should think about “value” in terms of both money and happiness.


Step 3: Assign Values to Each Subcategory of Spending

Once you’ve used the utility method or something comparable to assign values to each major spend category, start breaking each category down into individual spends. A category like rent can’t be broken down any more, but one like groceries can be divided into fifty parts or more.

Continue using the utility method until you’ve determined the value of each individual spend within each of your major categories. Compare each spend, and figure out which ones give you high utility per dollar. For those that bring a lot of value to your life, you should probably maintain or even increase your usual budget.

As for the categories that bring you low utility per dollar? They should watch out. Their days are numbered.


Step 4: Identify Categories to Cut

Now that you’ve analyzed your spending by amount and value, you can start to think about making cuts. Order your list by utility per dollar. Identify the areas that cost a lot, but bring relatively low utility to your day-to-day life.

For instance, I went through this process and realized that I was taking too many taxis in New York. The utility they brought me – relatively comfortable mode of transportation, ease of getting from place to place – didn’t justify the high costs.

Similarly, I rooted out a pricey habit in Boston that wasn’t bringing enough utility to be worth the cost. I would go to mid-end restaurants and spend $40 to $80 in each go. When I really thought about the “units of joy” these restaurants were bringing me, I wasn’t too impressed. The restaurants just weren’t that great, especially not for the prices. Cutting costs in this area saved me a lot of money without much effect on my overall quality of life.

Of course, identifying the wasteful categories and cutting spending in them are two different things. Read on for step 5, which discusses how to stop spending money once you’ve realized which areas are the biggest drains on your bank account and savings.



Once you’ve picked out spending areas to cut, you’ll need to come up with a strategy.


Step 5: Develop a Strategy for Cutting Spending

The first four steps of this strategy are all about analyzing your spending in terms of dollars spent and value gained. Once you find the areas with an uneven cost to utility ratio, you can identify them as the ones to cut.

Actually cutting costs, however, is the hard part. It involves changing up your habits and flexing a lot of willpower. If a change ends up making you miserable, then it may not only be hard to sustain, but it may also be the result of a miscalculation in a spending area’s utility. You need to find workable solutions that will leave you feeling encouraged, not frustrated or hopeless.

Let’s say you realize that your morning Starbucks lattes actually add up to a significant part of your monthly budget. If you go cold turkey on them, you might be miserable every morning and suffer caffeine withdrawal headaches. Using this brute force approach is not a workable solution.

Instead, you could consider less expensive replacements, like getting a coffee machine to make coffee at home. If you really wanted to eliminate coffee, you could slowly wean yourself off of caffeine, thereby cutting costs without the shock of completely eliminating something that brings value to your daily life.

If you’re going to cut a certain area, first be strategic about possible consequences and how to mediate them. If a cut causes too much disturbance too fast, then it will be hard for you to sustain it.

Beyond preparing for any potential side effects of a spending cut, you should also set specific goals for yourself. If your bar tab adds up to $200 a month, you might decide to reduce it to $100 a month. Then figure out what steps you can take to accomplish that goal, like inviting friends to hang out your apartment or skipping Thirsty Thursdays after work.

For the most part, you’re going to want to reduce big spending areas in your life, rather than eliminate them completely. Prioritizing what you need in each area will help.

If you’re cutting restaurant costs, for instance, then consider which restaurants have the most value for their dollar. If you’re buying a flight, choose the trip that you would like to go on the most. If your rent is eating up too much of your monthly paycheck, consider cheaper locations or smaller apartments.

The key point here is that you need to be specific about what your spending goals are in each spending category, how you’re going to reach them, and how you’ll handle the change of, say, crossing off one bar night a week from your social calendar.



After all your plotting and planning, it’s time to set your money-saving goals into motion!


Step 6: Implement Your Money-Saving Strategies

You’ve made a self-analysis, created a plan, and know where and how you’re going to cut spending in major areas. Now, you have to go out and do it!

Just as you took control of your budget by recording your expenses, you should also keep track of your efforts to save. Continue using Mint or Excel to monitor your spending. Figure out whether you met your specific spending goals in each category.

Don’t be hard on yourself if you fall short at first. Change is hard to make. If you did, though, take the time to analyze where you fell off the wagon and what you can change for next time.

This kind of self-reflection is important for sustaining your new frugal habits, as well as for making any necessary adjustments to further improve your spending-to-value efficiency.


Step 7: Reflect and Repeat

As you know by now, effective saving doesn’t happen on its own. It requires dedication, willpower, and a thoughtful plan. It also calls for careful reflection on how well you met your goals.

Using the data you put together in the previous steps, you should measure your progress at the end of each month. Compare your new spending habits to your old ones and see if you adapted to your target budget.

This reflection is essential for staying on track and making any needed adjustments. Again, don’t be too hard on yourself if you fall short. Simply consider what happened and what you can change for the next month.

Saving money is very similar to dieting in this sense. You know what you have to do, but you might have to try and fail a few times before you can reach your goals.

If you do find that you missed your goals by a significant amount, what reasons should you look for? What might cause you to fall short?



Maxing out all your credit cards at the mall would be a major setback. What are some less obvious obstacles that could stand in the way of your money-saving goals?


Why Might You Miss Your Target Goals?

Falling short of your savings goals could result from an error in any of steps 1 through 5. Let’s consider each step to find its possible pitfalls.


Error in Step 1

If you failed to identify a high spend area in step 1, then your cost-cutting might not add up to very much. Despite your best efforts, you might find little change in your savings.

Perhaps you just cut out coffee or switched from shopping at Whole Foods to shopping at Trader Joe’s. You’ve saved a little bit, but nothing all that substantial. It looks like you made changes in low-spend categories, and need to go back to step 1 and pick out the high-spend categories that will make more of a difference in your personal finances.


Error in Steps 2 – 4

Steps 2 through 4 are all about value and utility. If you miscalculated the importance of an area in your life, then your efforts to skimp might leave you in a world of pain. Again, we’re not just considering cost in dollars, but also in quality of life.

If you target a high utility area too aggressively, then you might get discouraged, give up on your savings goal, or end up unnecessarily unhappy. Look back at your method for assigning value and check for any miscalculations.



If you’re falling short of your goals, double check your calculations. You might need to crunch the numbers again.


Error in Step 5

Finally, step 5 is about developing specific methods that work for your willpower profile. You need to figure out what actions you can take (or stop doing) to cut a spending area successfully.

You might need to take a different route to work to avoid the Starbucks or be proactive about inviting friends to your apartment instead of the bar. If you didn’t develop customized strategies, then you may find yourself reverting to old habits.

Once you found your misstep, what do you do next?


Adjust Your Savings Plan

Once you figure out where your error was, revisit that step and fix it! Make sure that you chose high-spend areas that have a large effect on your spending and saving. Don’t overlook the value in terms of enjoyment and enrichment that certain spending areas bring to your life.

Be thoughtful and intentional about how you cut costs. A brute force or cold turkey approach rarely works in most areas of life. Saving money is no different.

I won’t give you any adages about a penny saved is a penny earned, but I will repeat one cliche that you should remember when striving to save money: if at first you don’t succeed, try, try again!



Saving money is key for long-term financial independence.


Best Way to Save Money: Key Points

Saving money is an exceptionally important part of managing your personal finances. Setting aside savings will help you through life’s inevitable surprise expenses, and it provides a safety net if you experience a big life change. Once you have a certain amount saved, you can set it aside in the stock market or a retirement account and see it grow exponentially thanks to compound annual growth.

Meeting your saving goals doesn’t have to involve a serious decrease in your quality of life or obsessive scrimping and coupon clipping. In fact, the money you spend on small purchases typically doesn’t affect your overall savings as much as people say it does.

Rather than focusing on tiny cuts, you should make more substantial changes in high-spend, but low-utility areas. Take the time to analyze your personal finances and figure out where your money is going. Rather than simply thinking in terms of dollars and cents, you should bring real, lived value into the equation.

You spend your money to improve your life in some way. Just make sure that you’re doing so in a way that’s significant to your happiness, rather than wasting money on fleeting entertainment that doesn’t bring much long-term value.

Finally, you should set specific, accomplishable goals and track your progress toward meeting them. In the end, you’ll see that your personal finances aren’t a mystery. You have control of where your money goes.

If you can alter your habits, then you can put that money into savings that will bring you a sense of financial stability now and in years to come.