5 ways to save 30% of your paycheck (mostly) without trying
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If you want to retire, like, ever, you need to save. If you were bad about saving in your youth — or you’re young and looking to fast-track your way to $1 million — you need to save a lot. Basic personal finance says sock away at least 20% of your paycheck each month. But since no one wants to be basic anymore — and most Americans are woefully underfunded for retirement and emergencies — it’s a good idea to aim higher.
Saving 50% of your income might be out of reach for many people, but you can probably get to 30% just by borrowing some advice from newly minted Nobel Prize winner Richard Thaler: Automate everything.
You’ll need to go into this little experiment with a tight budget. (We’ve got tips for trimming the fat here.) Once you’ve crunched numbers, you can use these five ways to save 30% of your paycheck (mostly) without trying.
We’re starting here because the employer-sponsored retirement account is probably the best automatic savings vehicle there is. Contributions are tax-deferred and earn a little thing called compound interest. Plus, there’s a good chance your employer matches up to a certain percentage of what you’re putting away.
Most companies do so up to 6% of employee contributions, although that doesn’t mean you can’t save more. (Uncle Sam has limits on annual 401(k) contributions, but they’re pretty high, especially compared to other investment accounts.) In fact, many people sock away a bigger percentage of each paycheck. Per a 2017 report from Vanguard, its customers put an average of 6.2% of their income in their employer’s plan in 2016. That number jumped to 10.9% of pay once employer matches were factored in. (Which would put you a third of the way to that 30% savings goal we’re talking about.)
These, days, it’s common to forgo a paper check for digital direct deposit. Most people send those funds to their checking account. It’s easy to see why. Gotta pay those monthly bills, you know? But employers generally let you allocate funds to more than one account, so you can have your cake and savings, too.
The best way to ensure the deposit sticks: Send the funds to an online high-yield savings account that’s in no way affiliated with the financial institution you do the majority of your banking with. That creates friction because transfers between banks can take a few days.
There are plenty of apps and services to help you maximize your pennies. Big financial institutions like Bank of America, Citibank and Wells Fargo have programs that automatically roll a little extra into your savings accounts, including whenever you make a purchase. Mobile-only Chime Bank has made a similar automatic savings feature central to its business model. Micro-investing app Acorns will round up your credit card purchases and invest those cents into an exchage-traded fund. There’s a fee for this, but it can be a good way to test-drive investing.
If you have a high-deductible health insurance plan, you probably have a health savings account (HSA). And if you have an HSA, you’ll want to make sure you’re automatically rolling enough money from your paycheck into it to cover your deductibles and copays. Beyond serving as a safety net for your medical expenses, HSAs are a valuable savings tool. Contributions are pre-taxed and can earn (also tax-exempt) interest.
Plus, unlike a flexible spending account, that money rolls over from year-to-year. Once you turn 65 years old, you can take penalty-free distributions from an HSA for any reason, not just medical care, making it a de facto supplemental retirement account. Note: There are limits to how much you can put away in an HSA each year, too. For 2018, it’s up to $3,450 for individuals and up to $6,900 for families. You can learn more about whether you need an HSA here.
That’s a budgeting technique that essentially makes saving a mandatory monthly expense. In other words, you set a savings goal upfront (in this case whatever amount you need to hit that desired 30%) and put that amount away before you budget for anything else. You can read more about the savings strategy here.
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