Growing Your Savings Rate in Your Financial Plan
Hi everyone! Welcome back to Melissa Making Cents!
In my recent overview of budgeting, I talked about one of my favorite approaches: the 50/30/20 rule. In this model, 50% of after-tax income is allocated for “needs,” 30% is used for “wants,” and 20% goes toward “savings.” When I explain this approach to my financial coaching clients, some of them feel intimidated by the savings goal. And if you’re not used to budgeting or saving, 20% might seem close to impossible.
The reality is that not everyone will be able to save 20% right away. And that’s okay! That’s why it’s a goal to work toward and not a rule that’s set in stone. Savings are important because they can be used as part of your rainy day fund, your retirement, or for long-term goals like a down payment or your child’s college education. Savings will also give you more financial peace of mind in the event of an emergency, income loss, or other major life change. Today I’ll talk about some ways to grow your savings rate over time and build healthy financial habits.
Start by saving what you can for your future.
If 20% sounds daunting, it’s okay to start small. Make a goal of as little as $5 per week just to get in the habit of saving. Put your savings into a dedicated account that’s separate from the money you would usually spend each month. Depending on your goals, the savings could go into your regular savings account, your 401k or IRA, or a 529 college plan for your children.
Gradually increase your savings goal over time.
When you hit your initial goal--even $5 per week or $20 per month--start to increase the amount you save. A fun psychological trick I like to recommend is to turn savings into a game. If you saved $20 one month, see if you can save $25 the following month, and so on. You could think about savings in terms of absolute amounts ($20 per month, etc.) or in terms of percentages (10% of your income). Either one is fine, as long as you’re actively saving!
Remember, Rome was not built in a day, and neither was your financial future!
Automate your savings for out of sight out of mind planning.
One of the easiest ways to save money is to automate as much as possible. If you don’t see that money in your checking account to begin with, then you can’t spend it!
There are a few ways to automate your savings. If your employer offers a 401k, allocate a certain percentage of your paycheck to be automatically deducted and put into your retirement account. If you are paid via direct deposit, you can also request that a percentage of your paycheck goes into a savings account rather than into your checking account. Most bank accounts will also allow you to automate transfers from your checking account to a savings account, if you would prefer to set aside a certain amount of money for savings on a weekly, biweekly, or monthly basis.
In fact... if you are reading this, transfer a little extra to your savings right now. Let me know when it's done!
See where you can cut back on your spending.
Have a few too many magazine subscriptions that you don’t use? Or is your restaurant spending a big part of your “wants” budget? Take a look at your expenses and see where you can reduce spending in order to grow your savings instead. My breakdown of “wants vs. needs” in a financial plan is a good place to start.
Take advantage of an employer match for your 401k.
Your retirement fund should be a big part of your overall savings goal. The good news is that many employers offer a 401k match, in which they will contribute additional money to your employer-sponsored retirement account based on how much you put in. For example, an employer may offer a 100% match up to 4% of your compensation, which means that for every dollar you put into your 401k, the employer will also put in $1, up to 4% of your salary. Take advantage of this “free money” to grow your savings, too!
Watch out for lifestyle inflation.
Suppose you just got a raise or a huge bonus. Take a minute to celebrate that your hard work is paying off--and then think about what that money means for your savings. Whenever you start earning more money, it’s tempting to start spending more, too. Even when you get a windfall, try to keep your expenses around the same so that you can put more of that money into your savings account.
This phenomenon is also known as "lifestyle creep"! In lifestyle creep situations, I like to work through wants vs needs exercises. Driving a nice car and having a nice home is a great goal but they can both come at an expense. Not to mention the expenses, like home and auto insurance, that go hand in hand with that nice car and house. If your expenses creep to quickly you could find yourself financially underwater.
I ask my clients to commit to being in control of their finances, and not letting their finances control them.
Savings are an important component of your overall financial health. But don’t get discouraged if achieving a high savings rate doesn’t happen right away! Life happens and circumstances evolve, so the most important thing is to keep working toward your goal. A financial coach can also help you review your budget and spending in order to find opportunities to save more money. If you need some guidance in creating a plan to grow your savings rate, please call or email to schedule an appointment with me.
Until next time...this is Melissa Making Cents!
Melissa Anne Cox CERTIFIED FINANCIAL PLANNER™ is also a College Planning and Student Loan Advisor, and Financial Coach in Dallas, Texas.