Saving is the first step to building wealth.
We all know saving money is important, yet many of us struggle to make consistent progress.
Here are nine hacks to help you start saving more today.
1. Remember net worth trumps income
Do you know your net worth?
Many people know the number on their last paycheck, but not their net worth. That’s a shame, because net worth is the single most important personal finance metric.
Net worth is what you own minus what you owe. It’s an important figure, because as net worth expands, so does financial freedom. The higher your net worth, the more passive income potential you have. The more passive income you have, the less you need from your next paycheck.
Here are two ways to start tracking your net worth:
- Microsoft’s free template
- Personal Capital offers a great app
2. Apply the 50/30/20 Rule
Until you make expanding your net worth a priority, your money will always find ways to spend itself.
This is where we talk about budgeting.
You need to eat. You need a roof over your head.
To be able to save properly for the future, aim to keep essential expenses like these under 50% of take-home pay.
Reserve about 30% of income for “wants” (i.e. travel, entertainment, etc.).
That leaves approximately 20% residual income you can apply to savings and/or paying off debt.
3. Comparison shop interest rates
Maybe you should refinance an auto loan? Or consolidate student debt?
If you have any debt whatsoever, I recommend checking out the personal finance website Make Lemonade. The site helps simplify finding the best deals on a wide variety of loans.
4. Establish clear goals
There’s a saying, “If you don’t know where you are going, any road will get you there.”
To save enough, we must define how much is “enough.” We need benchmarks.
The biggest event most people save for is retirement. Everyone’s number is different, but the range of how much you need to achieve true financial independence is probably between 10 to 20 times your income. Since above-average inflation is common in many retirement spending categories (e.g. health care inflation averaged 4.8% between 1982 – 2017), I advise leaning on the conservative end of that spectrum.
5. Build momentum with mini-steps
Inertia can be a form of mental prison. To breakout, focus on building positive momentum from wherever you are.
The journey of a thousand miles begins with one step.”
– Lao Tzu
BJ Fogg runs Stanford’s Persuasive Technology Lab. He developed the “Tiny Habits Method”. The idea is to use easy to execute mini-steps to help achieve big goals.
One way to apply Fogg’s method is to focus on saving 1% more than you currently are. Thanks to the power of compounding, that small amount can turn into a meaningful figure.
“Saving for retirement may seem like a steep mountain to climb, but the climb doesn’t have to be as steep as it looks,” says Jeanne Thompson, senior vice president of retirement insights at Fidelity. “Small steps now can turn into big strides later.”
Fidelity has a nifty tool to analyze how small shifts in saving rates can impact your future lifestyle.
6. Use raises to save more
Many of us have a tough time saving more of our current income because of a behavioral bias called loss aversion. We feel like we’re giving something up.
However, we do not feel the same sense of loss when we commit future wage increases or windfalls to savings.
Wage gains are picking up. Take advantage! This is the time in the cycle where you may be able to play catch-up if you feel behind in your long-term saving goals.
7. Implement the 72-hour Test
Impulse purchases can easily derail a savings program.
One tactic I like to combat this tendency is Carl Richards’ “72-hour Test”.
Instead of succumbing to Amazon’s One-Click ordering system, try leaving items in your shopping cart for 72 hours. After a few days pass, many items will lose their original appeal.
Treat your savings/brokerage account like it’s another monthly subscription. If you pay $9.99 monthly for Netflix, Hulu, Dropbox or whatever, you’re accustomed to connecting that expense to your checking account and letting the withdrawal happen without any thought.
Likewise, you can automatically pay yourself more each month by setting up automatic monthly deductions to your 401(k).
9. Save in the right places
Last, where you stash your savings can make a big difference. Tax deferred vehicles are the best place to achieve maximum compounding benefits.
According to the U.S. Census Bureau, only 32% of Americans are currently saving for retirement via a 401(k). The number should be higher.
If your employer offers a 401(k) program, you can contribute $18,500 annually. After age 50, the ceiling rises to $24,500. Whatever your limit, it’s wise to put aside as much as you can. Even if you don’t have access to a 401(k), you can still open an IRA and enjoy similar tax benefits.