Building up savings is one of those financial goals where intention often runs into the roadblock of reality. There’s no question you want to save more, but without a plan for how to pull it off, you can get to the end of each month without the extra cash flow to earmark for savings.
Here’s how to become a super saver:
Make it Automatic. No more relying on good intentions. You can set up an automated saving system that will pull money from your bank checking account and deposit it in your spanking new savings account. The automatic deposit can be weekly, monthly or quarterly; you’re in charge of setting the frequency. And no worries: it’s a free service.
Check out Online Savings Banks. You can set up a savings account at your current bank, but first, take a quick online search-spin through “high yielding savings accounts.” There are many online banks that now pay an annual interest yield of at least 2%; that’s typically a lot higher than what your local bank or credit union offers.
Create Separate Savings Accounts for Each Goal. You likely have at least a few different savings goals. Maybe an emergency fund, a home down payment, cash for your next car purchase, or a special anniversary vacation you’ve got in the plans. Research has shown that it can be easier to commit to saving—and stick with a savings goal—if you rope off that money into its own account. If your online account allows it, name the account for its goal. Such as “HomeDP” or “EmergencyFund.”
Pre-commit to How You Will Handle Raises and Bonuses. When your income gets a bump up it’s a perfect opportunity to increase your savings. The key is to vow ahead of time what percentage of a raise or bonus you will earmark for savings. For instance, if you get a 3 percent raise, how about using half of that for savings? You could increase your retirement savings or what you’re tucking into a bank savings account by 1.5 percent. Fifty percent is just a suggestion. The higher the better.
Beware Lifestyle Creep. Take a cue from the FIRE movement: living the life you want doesn’t require spending more. Yet it’s all too common that as we move up the income ladder we tend to spend more. The nicer car, the more expensive restaurants, the fancier hotel at a favorite getaway spot. Consider what you could save if you focused on not expanding your spending as your income rises. You can still drive a car, eat well and vacation plenty, just spend less money on them so you have more to save.
Reduce Your Tax Bill on Savings and Investments. Retirement accounts such as 401(k)s and individual retirement accounts (IRAs) help reduce your investment taxes. A health savings account (HSA) is an even better tax deal. An HSA is the only way to save that offers a triple-tax break.
Don’t Rely on Your Employer to Figure Out Your Savings Rate. If you have a workplace retirement plan, there’s a good chance your employer automatically got you enrolled in the plan. That’s great. But there’s also a good chance your employer decided how much of your salary you should save in your retirement account. Many employers set the contribution rate at 3 percent of salary. That’s way too low. A 3 percent contribution rate probably isn’t even enough to pocket the biggest company-match you are entitled to. And it’s woefully short on what you should be saving for retirement. A good rule of thumb is that if you save at least 10 percent of your pretax salary (15 percent is even smarter) you should be in pretty good shape come retirement time. If you’re not yet at 10 percent, get there ASAP.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.