Do you want to save money? Do you want to save more of it? Of course you do.
Money is arguably the biggest source of stress in Americans’ lives. It doesn’t matter whether you’re just getting started or you’ve been saving for years. The uncertainty around saving makes many people fearful about whether they have enough set aside for the future.
I like to think about saving as paying your future self. By allowing yourself to feel a little pinch now, you create opportunities for your future self to achieve long-term goals.
How do you know if you’re on track?
Check out this Self-Worthy article about the 50/20/30 rule to get a gut feeling about whether you’re currently saving a sufficient amount. According to this rule, your savings goal should be 20% of take-home pay.
If you’re nowhere close to saving 20% of your take-home pay, don’t panic. Start small and build your way up incrementally.
I’ve used the same methods described here to gradually increase the amount I save. I started out saving as much as I could ($25 per week) and now I save about 40% of my household’s take-home pay. I certainly didn’t get there overnight. Instead I increased my saving whenever I had the opportunity to do so.
But don’t wait to make a change! The earlier you get started, the sooner you will be on your way to building a comfortable savings for the future.
Save More Money the Easy Way
What’s the absolute easiest way to save more money? Automate it!
Money that you save automatically gets “taken out of the equation” mentally. If you never see this money, you don’t treat it like you have it available for spending.
These days, saving automatically is simple. There are a couple of easy ways you can do it.
You can use direct deposit to split your paycheck into two separate deposits. One deposit goes into your checking account for your normal monthly bills and spending. The other goes directly into your savings account.
If you’re not able to split your paycheck or you don’t have direct deposit, you can still automate your savings. You can use online banking tools to achieve the same effect.
This is the method I’ve used to automate my savings. Once a week, an automatic transfer deposits money from my checking account into my savings and investment accounts. Easy!
Once you have automatic deposits in place, use a “set it and forget it” approach. Treat this money as off-limits (or non-existent!). You’ll gradually build up your savings with zero effort.
What Should You Automate?
Automatic savings is a great way to save more money, but where should you direct that money?
There are many possibilities, and it can feel overwhelming trying to decide what to choose. I recommend these three places as the best starting point:
1. Deposit into your 401(k) or other employer-sponsored retirement account
Do some research on your employer-sponsored retirement program. Find out what contribution your employer will match, then contribute that percentage of your paycheck into your 401(k).
I’m giving you this option first because an employer match is free money you pass up if you don’t max it out. With an employer match, it’s like your deposit instantly doubles! Pretty sweet, right?
2. Deposit into an emergency fund
Transfer money from your checking account into a separate savings account. Consider this money “for emergencies only” at least until you reach a certain threshold.
A typical rule of thumb is to save about three months’ worth of expenses into your emergency fund. This amount can feel daunting, though, especially if you’re just getting started.
If you’re starting from zero, first aim to save two weeks’ worth of pay or $1,000 (whichever is larger). Continue to set small milestone goals until you reach the full amount you’d like to have in your emergency fund.
In reality, a savings account is just as accessible as a checking account, but the connotation of “savings” creates a mental hurdle. You are much less likely to touch this money. If you don’t touch it, you don’t spend it!
3. Open an IRA and max out contributions
When it comes to retirement savings, you don’t want to put all your eggs in one basket. An IRA is a great choice to save more money for retirement, even if you have a 401(k) or other employer-sponsored retirement account.
There are two types of IRAs: Traditional and Roth. I’ll save you the comparison details in this article and instead direct you here if you’d like all that information.
The main important difference is how the two are taxed. Basically, if you expect you’ll be in a higher tax bracket at retirement, a Roth IRA is the better choice. (AKA If you’ll be earning more money at the time you retire than you do now.)
Especially if you are early in your career, a Roth IRA can have some serious benefits. The money you contribute to a Roth IRA is taxed before it’s deposited. It is not taxed when you withdraw it during retirement (and when you likely would be liable for a more hefty tax).
Bonus Automation Tip: Investment Accounts
You’re a rock star and you’ve got your bases covered with an emergency fund and a couple of retirement accounts. What next?
Investment accounts are fantastic if you treat them similarly to retirement accounts. Assume you’ll be depositing money and not touching it for a long time.
This is because emotions-based investing can result in a 20% loss in returns over a 10-year period compared to passive investing. Investment accounts perform better over time if they are approached with the same “set it and forget it” mindset.
Investing can feel scary at first, but there are plenty of simple options that can ease you into it.
Robo-advisors are becoming more commonplace now that they’ve been vetted for a few years. These services provide low-cost account management with automation to keep emotions at bay.
I personally use Betterment as my main method of investment. Betterment has a user-friendly interface and makes investing super easy!
If you are new to investing, start off small until you get your bearings. Gradually build up your investment the same way you would with any other account.
Let’s Get Saving!
Now that you have a few options at your disposal, where do you plan to get started? Are you interested in learning more about IRAs or investment accounts? Let me know in the comments!
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