Saving money is relative. If you have credit card debt costing you a crushing 18 percent interest, putting $100 per month into a passbook savings account where you earn 2 percent on your money really means you’re spending even more (and certainly not saving).

So the first step to saving money is to spend less, and that includes paying off your debt as quickly as possible. Choose the loan with the highest interest rate first and pay that off, then move to the next highest interest rate, and so on.

Actually, when you pay off debt before it’s due, you’re actually “earning” a rate of return on your money equal to the interest rate that the debt carries.

Here’s how it works: If your credit card carries an interest rate of 16.9 percent, every $1 you prepay on that loan effectively earns 16.9 percent thanks to the way interest is compounded.

Once you pay off your debt and start saving money for your retirement, compounding is the same feature that can turn $2,000 a year into hundreds of thousands of dollars 30 years from now.

Pre-paying your debt offers a guaranteed return, and it’s one of the reasons why you should pay down all of your non-deductible debt first. (A mortgage is deductible, if you itemize on your federal income tax return; a credit card debt is not deductible.)

But let’s say you’ve already paid off all your loans except your mortgage. How much should you save?

If you’re saving for your retirement one school of thought says Social Security is going bankrupt, save every penny you can. Others say, it depends on how old you are, when you plan to retire, what kind of life you plan to lead once you retire, and what kind of rate of return you can get on your cash.

If you’re saving for goals that are a bit closer, like a college education, a wedding or a down payment for a home, you’ll have to assess the time you have and the return you can get.

Americans don’t, as a rule, save that much, perhaps 5 percent of our income. Some people save more, most save a lot less.

How do we compare to other countries? Japanese typically save about 10 percent of their income. So what, you think? So they’ll retire with twice as much as I have. Hardly. The way compounding interest works, they might retire with four or five times as much as you have.

Would you rather save an extra thousand dollars today but end up with an extra $200,000 when you retire?

It doesn’t really matter how much you save compared to, say, your Uncle David or your friend Susanne. What really matters is how much you’re saving relative to the savings goals you’ve set for yourself. The Ivy League education you want for your children could cost as much as $70,000 a year by the time your toddler is ready to enroll.

But as the cost of that education or new car or trip around the world grows, so do your savings – hopefully at a faster rate than both inflation and the rising cost of a college education (between 5 and 7.5 percent a year).

How much you save this month and next month (and every month until you retire) depends on what you want to purchase, and when you want to purchase it.

First Things First:

1. Pay off your debt. Start with the highest and work your way through all your non-deductible debt. These days, the only debt that is deductible is the interest paid on a mortgage or home equity loan.

2. Put cash aside into a liquid emergency cash fund. Experts recommend you have at least 6 months of living expenses in there just in case. You can get away with as little as 3 months if you have other semi-liquid investments.

3. Make sure all of your insurance premiums are completely paid up.

4. Start saving toward your financial goals. You don’t have to make much each year. You just have to spend less than you earn and invest it wisely. And if you’re lucky, you’ll wind up a multi-millionaire.

How Much Do You Need?

Economists look at everything in current dollar values. So if you’ll need the equivalent of $50,000 in income in today’s dollars when you retire in 35 years, plan on saving enough (or achieving a high enough rate of return) to have $3 million saved. If your money earns 10 percent a year (a hefty clip equal to the average return of the stock market), you’ll need to save about $1,300 per month for 30 years.

PERSONAL FINANCE TIP: Saving money can be as easy or as tough as you make it. Everyone has their own tips and remedies.

For 50 cents, you can get a copy of a booklet called “66 Ways To Save Money” by writing to Save Money, Pueblo, Colorado 81009. Written by the non-profit Consumer Literacy Consortium, these tips can help you save more than $1,000 without changing your lifestyle.

A few of the tips: Find the long-distance calling plan that will save you the most money each month (some plans only charge 5 cents a minute if you call on Sundays); buy food in bulk at stores like Sam’s Club, Price Club, and WalMart; and, choose bank accounts whose minimum balances you can meet easily to avoid bank fees.

Some of my favorite ways to save money including shopping the sales, raising the deductible on my insurance premium, switch insurance policies, and send in rebates.

Remember this: Saving money and starting to take charge of your finances not only looks good on paper, it feels good. When you start to take control of your finances, you’re taking care of yourself and your family, and the peace of mind you get from knowing you’re doing the right thing will manifest itself in your ability to save even more and invest more profitably.