4 Painless Ways to Save

4 Painless Ways to Save

Benjamin Franklin once said, “A penny saved is a penny earned.” Unfortunately, the most difficult job I have as a financial planner is to get people to save money.

I think there are two reasons for this. For starters, median household income adjusted for inflation has stagnated over the last several decades. It seems that more and more of our income is needed just for the basic necessities of life. Secondly, we humans like instant gratification. For most of us, spending money is so much more natural than setting it aside to enjoy years from now. We all know we need to save for retirement – we just want to delay saving until next year.  Unfortunately, next year never comes until we reach our 50s, when time isn’t our ally.

Believe it or not, getting started is the hardest part. Once you start saving on a systematic basis, it gets easier and easier. Here are four painless ways to make that happen.

1. Get on Autopilot

If you have a hard time saving money, you need to make saving as easy as possible. If your employer has a retirement plan, use payroll deduction in order to start saving. If not, then use direct deposit from your bank account each month.

Some people get nervous about saving automatically because they worry about whether or not they’ll have enough left over to pay the bills. So, they decide to wait and see how much they have left in their checking account at the end of the month. The problem with that is, for most of us, there’s nothing left over. We find a way to spend that money. You have to build the savings into your budget, or you won’t save.

2. The 2% Rule

How do you start saving and not break your budget in the process? Start small. You wouldn’t try to run a marathon the first day you start jogging. Don’t try to start saving 10% of your income either.

My suggestion would be to start saving just 2% of your monthly income. For each $1,000 of income, you’ll be saving $20. Trust me, you won’t miss that money. Then, increase your savings rate by 1% of income annually until you reach the level necessary to achieve your desired retirement nest egg. So in year two, you would increase your savings rate to 3%, and then in year three to 4%. In year five, you’ll be saving 6% of your income.

The key is that you’ll be doing it in bite-sized chunks. For example, if you begin by saving $50 a month, you’d increase it to $75 the second year and $100 in the third. Could this actually make a difference since you are saving so little? You bet. If you begin saving $50 monthly at age 45, and bump your contributions up each year until the end of year five, and then maintain that amount until age 65, you’ll have $61,000 if the account grows at 6%. If you begin with $100 monthly, you’ll have $122,000.

If you’re age 35, those amounts would be $134,000 and $269,000, respectively. Granted, you won’t be living like Warren Buffett on nest eggs this size, but if you don’t start saving, you won’t even have this.

3. Always Take Advantage of Employer Matching Contributions

According to the Bureau of Labor Statistics, most employers who offer a 401(k) plan offer a 50% match up to 6% of salary. So if your salary is $50,000 per year, your boss will give you a $1,500 match if you save 6% of your income.

If you don’t take advantage of the match, you aren’t just walking away from $1,500. Over 20 years, that $1,500 annual match turns into $55,000 at 6% interest.  And that’s assuming you don’t get any salary increases over that time.

4. Adjust Your Federal Tax Withholding

Many people withhold way too much from their paychecks for federal income taxes. I get it. It’s nice to get a big refund in May or June and go on vacation. But by doing this, you are essentially giving Uncle Sam an interest free loan for the year.

Try this instead. Adjust your federal withholding so that you get a minimal amount back – say a couple hundred bucks. Take half of the freed-up take home pay and sock it into your savings account for vacation (or to pay Uncle Sam on April 15th if you mess up on your tax withholding). Take the rest and invest it for retirement.

These are just a few ways to make saving painless. There are many more. Do you have a way that got you started? I’d love to hear it.