The median net worth excluding home equity for Americans approaching retirement age is around $46,000. Using the 4% rule as a guide to sustainable retirement spending levels, $46,000 will provide around $1,840 per year in inflation-adjusted spending power. Throwing sustainability out the window, that $46,000 will provide a couple with a little under three years of a poverty-level lifestyle before running out entirely.
Clearly, as a country overall, we need to save more money. That said, saving is clearly tough to do — if it weren’t, there’d be a lot fewer people depending on Social Security for a majority of their incomes in retirement. To make saving a bit easier and enable you to improve your chances at having financially comfortable golden years, here are five simple tricks for saving more money.
No. 1: Make it automatic
Your 401(k), 403(b), TSP, or other employer-sponsored retirement plan can be an incredible tool to help you save more money. Perhaps the best feature of those types of plans for someone who needs to save more money is that once you sign up to contribute to yours, it’s automatic. The money comes straight out of your paycheck and starts compounding for you as soon as it gets invested.
Generally speaking, there are two families of employer-sponsored plans: Traditional and Roth. In the Traditional plans, the money comes out of your paycheck pre-tax and compounds tax-deferred on your behalf. You do pay ordinary income taxes when you withdraw that money in retirement. In the Roth plans, the money comes out of your paycheck after taxes are calculated, and it also compounds tax-deferred on your behalf. Once you qualify, though, retirement withdrawals from Roth plans are tax-free.
No. 2: Bank your tax adjustment
Every fall, the tax brackets are reviewed for a potential inflation adjustment for the next year. In 2019, the brackets will adjust upward a bit, and the standard deductions will increase somewhat as well. As a result, all else being equal, your first paycheck in January will be a bit bigger than it would have been without those adjustments.
If you were making ends meet before that adjustment, you should still be able to make ends meet after this adjustment hands you more money. If you start saving that extra cash headed your way, you can begin improving your nest egg without feeling any pinch from the adjustment. While each individual adjustment might be small, over time, it can add up.
No. 3: Save half your raises
The average salary increase was around 3% in 2018 and is expected to be similar in 2019. No matter what sort of raise you get, when you get one, your paycheck immediately after the raise will be a bit larger than it was immediately before it. If you were covering your costs before the raise, then the raise itself is gravy. Sock away half of it, and you’ll soon be making substantial progress toward improving your savings.
Why half? Well, when your paycheck goes up, so do your taxes, and in some cases, your benefits costs may rise as well. If you save half of the raise, some of the rest can go to pay for those increased costs, and you will still likely keep a little something extra in your take-home pay as an immediate reward for a job well done.
No. 4: Save your tax refund — twice
Tax refunds have generally averaged between $2,500 and $3,000 each year over the past decade or so. While it may feel good to get that large chunk of change, the reality is that your refund is nothing more than a return of money you loaned to Uncle Sam interest-free. If you really want to loan Uncle Sam money, buy Treasuries and at least get paid a little for the use of your cash.
If you were living throughout the year without that money, it’s an excellent idea to save it, since you won’t feel its loss from your monthly cash flows. In addition, you should be able to adjust your withholdings to get your refund closer to $0 in the future, freeing up a bit from each future paycheck as well. That way you can effectively save your refund twice, once from the refund check itself and the other time through the increased take-home pay from your reduced withholdings.
No. 5: Treat your savings like a priority bill
One of the easiest ways to not save money is to treat your savings like it’s where you put the money left over at the end of the month that you don’t spend on anything else. The trouble with that approach is that your absolute must-haves come first, followed by things you want to spend on, then the absent-minded spending that happens simply because you have the money. As a result, your savings are often neglected.
If you treat your savings like a priority bill and put money toward it first each paycheck, it will be taken care of before the absent-minded spending kicks in. What you’ll likely find with this approach is that you’ll still have enough to cover your needs and take care of some of your wants, but you’ll waste a lot less cash on things you don’t really care about. It can be a pretty painless way to boost your savings.
The more you save, the better off you’ll wind up
The money you save today can go a long way toward providing you with a better future. It doesn’t take much to start down the path of building wealth, but once you do, you’ll begin to feel the incredible sense of empowerment that comes from being in control of your own money. As that money compounds on your behalf, you’ll help yourself get closer to your own financial independence day.