Sometimes it feels like saving any more money than you are doing currently is going to be impossible. Yet, you are probably not saving enough money every month in order to plan for a comfortable retirement.
Let me share with you a couple of numbers first:
- The average saving rate in the US is around 5%. With the median salary just over $50,000, that means your average American household is saving $2,500 per year. If they’re not too bad with their financial planning, and manage to get a rate of return of 5% per year for the next 40 years, they will have $174,433 saved for retirement. That’s good but far from great.
- If you want to have a million dollars saved for retirement instead, and your brokerage account is returning 8% annually for 30 years, you need to save $700 a month. Over three times more than the average US household.
With the tricks below, you will see that saving more money is possible for everyone, and I hope these numbers just motivated you to get started as soon as possible.
Have a financial overhaul
There are probably areas in your life where you are paying too much money. Time to call your providers and negotiate your rates for utilities, broadband, and even your debt. If you are carrying a credit card balance, apply right now for a 0% balance transfer and throw every dollar you can at your debt.
If you pay your cards every month, get a cash back card to save on your everyday purchases, or a travel rewards card to get free miles and hotel nights for your next holiday.
Make it a challenge
Saving money is often synonym of deprivation. It doesn’t have to be. You can start saving progressively, using for example the 52 week saving challenge, where you save $1 on the first week, $2 on the second, … all the way to $52 the last week. You should have over $1,300 by the end of the year.
Another challenge can be filling a jar with all your spare change every day, or save every $5 bill that ends in your wallet. I also like the “month without” challenges, where you try to go 30 days without lattes, eating out, meat, or any other thing in your budget. Often the 30 days go by and you don’t feel the need to buy these things anymore. A couple of friends haven’t bought clothes in over a year!
Invest all your windfalls
Right now, it is tax refund season. On average, American households are getting a $2,800 check. Be wise with yours! If you only invest that (at 8%), and nothing else during the rest of the year, you could have over $350,000 saved for retirement in 30 years! That is twice as much as saving 5% of a median income every month.
While your tax refund is expected, investing other windfalls, inheritances, work bonuses, etc. are an easy way to save more money. Keep 10% for fun money so you don’t feel deprived, and invest the rest before you get a chance to spend it.
Max out your tax free accounts
Your 401k and Roth IRA are allowing you to invest money pre tax. What it means is that when you invest $100, if you are in the 25% tax bracket, it only costs you $75. Yes, you will still need to pay taxes when you access that money in retirement, but by this time, compound interest will have grown it many times over, and since you won’t be earning an income anymore, you should be in a lower tax bracket.
So before you invest anywhere else, find your tax advantaged accounts. Also make sure you take your full company match. The usual match is 100% up to 6% of your gross income, so that means a free $3,000 if you make $50,000.
Make more
If you can’t save more money month after month, it might be because there is no room left in your budget for saving. If you have a second look at the numbers above, you can’t really afford to delay saving for retirement any longer. There will always be something. Buying a bigger house for the family, sending the kids to college,… that will stand between you and a higher saving rate. So you need to make more money.
Since you make it work on your current income, you can save 100% of the extra money you make. You should start by asking for a raise at work. A one time $5,000 raise means $150,000 over the next 30 years!
Say you are shooting for a million dollars 30 years from now and need to save $700 per month, that is $8,400 per year. Your company matches $3,000 so you only need $5,400. After your $5,000 raise, the difference will be coming up with $400 gross, or $25 net on your monthly paycheck.
How is that for an easy way to save money?
