How are you doing with your retirement accounts? Do you feel like you’re saving some but not enough? Most advisors will tell you to maximize your 401(k) contributions, especially if you have matching benefits from your employer. And your total retirement savings should equal 10-15% of your income. Advisors also suggest having 6 months of living expenses on hand to cover you in case of layoffs or emergency.
So how’s that working for you in real life? Maybe not great. But what can you do?
Most people feel that saving is a matter of willpower. Every spending choice requires the discipline to spend as little as possible. Don’t buy the new iPod. Don’t go out to dinner. No popcorn at the movie.
But brute-force willpower takes energy and focus. Anytime you’re tired or distracted or overwhelmed, willpower disappears1 and your money goes with it. So rather than having to make a decision every time you get out your wallet, why not stack the deck in your favor?
Here’s the secret: automate your savings. Using a simple automation strategy, you’ll be able to sock away more cash without having to keep up the willpower fight every day.
First, use the magic of automation to find more cash to save. Look for ways to lower your monthly bills, and you’ll instantly have more income to work with. Here are some ways to painlessly lower expenses.
• If you’ve owned your home for a while, see if you have enough equity to stop private mortgage insurance. You may save several hundred dollars a month, which can go directly into savings.
• Review insurance policies. Check to see if your coverage fits your current lifestyle. You may be able to adjust and save. Or you might be able to combine policies for a lower overall premium.
• Review your cell phone plan. See if you can get a cheaper plan or take advantage of a special offer. Check your usage. Your plan may be too large for 1 American Psychological Association. Is Willpower a Limited Resource? https://www.apa.org/helpcenter/willpower-limited-resource.pdf your actual usage. Or you might be able to combine several users into one plan for a cheaper overall bill.
• Lower electric bills by keeping your thermostat lower in the winter and higher in the summer, especially when you’re out of the house during the day. Get a programmable thermostat, so you can set it to match your daily schedule and then forget about it.
• Lower discretionary spending with this little trick. Give yourself a budget for spontaneous spending, like movies, treats, etc. Put this budget as cash into an envelope each month. Use that for your mad cash, and when it’s gone, you’re done for the month.
So great! You’ve found automatic savings that don’t require any willpower. But now you have to make sure that extra money makes it to your savings accounts, so you won’t be tempted to spend it on a 20-foot Blow-Up-Lawn-Santa for the holidays. Here’s where the power of automation can work for you again. Estimate the savings you got from reducing monthly bills and set up automatic payments to your 401(k) or savings accounts.
• Make sure 401(k) contributions are deducted from your paycheck. If you can, increase the deduction amount to reflect your newfound savings.
• If you don’t have a 401(k), you can set up automatic transfers from your bank account to your IRA or a savings account.
• Whenever you get a raise in income, go and increase your savings contributions by 10% of your additional income. That way, your savings flourish along with your income. Everyone knows how important it is to save for the future, but saving is just no fun. So employ the magic of automation to grow your nest egg pain-free.
Published March 23, 2015