Last week, I shared a few pointers on how ordinary salaried folk with regular mid-level jobs can change their financial habits and accelerate their way into saving the most money, ever. So let’s continue that thread, beginning with number 10, with more habits of people who are great at saving money because when it comes to building your nest egg, these little moves can add up big.
- Good savers adjust for life changes. You’d be amazed at how many people get divorced but keep living their married lifestyle. Big life changes, like job layoffs, divorces, and illness, inevitably affect our budgets. Good savers amend their spending to reflect their new earning or income status regardless of how painful it is to acknowledge and adjust to. They’re happy to downsize from a big home to a smaller apartment or home in a less expensive neighborhood or give up a fancy big car or van for a more modest energy efficient or used model…things like that, where these cutbacks continue to boost savings through lower monthly mortgage or rentals, lower utility bills, lower insurance and gasoline expenses, etc. And they take these savings and plow them back into investments with increased urgency so they can meet their new financial and retirement goals.
- Good savers take free money. I often come across people who do not invest in employer-supported 401(k) plans or other such matching contribution plans, and that just stumps me. It’s like sweeping thousands of dollars into the trash can, money that you can legally take—literally free money leaving it just doesn’t make sense! So find out if your employer gives you a discount on your health insurance for getting a check-up every year, or offers employee stock options, or matches your retirement savings. Also, look at other sources of free money, such as flight miles or hotel points accrued that could save you hundreds on your next flight or vacation stay. Don’t be one of the many people who leave this “free money” on the table. Sometimes, it may take a little extra effort to fill out the paperwork, but it’s so worth the time.
With tax season just over, I want to make sure you’re also taking advantage of options such as Health Savings Accounts, Flex Spending Accounts, etc. For example, in 2016 an HSA lets you invest up to $6,750 with pre-tax money; in other words, your HSA contribution reduces your taxable income; and you can invest this money in stocks, bonds, etc., and tap into it without penalty after the age of 65, even for non-healthcare expenses. So an HSA account really can boost your retirement savings.
Let’s say you are in the 25% tax bracket. By investing $6,750 in an HSA account and taking the HSA deduction on your Form 1040, you effectively pay about $1,700 less in taxes—that’s $1,700 in free money simply for setting money aside for your and your family’s healthcare expenses. But so many Americans choose to forgo this money, and unknowingly pay that much more in taxes. So become a good saver by talking to your financial planner and tax preparer, and take advantage of all these great ways of legally saving taxes and putting those savings to work for you.
- Good savers have 3 to 6 months of expenses saved. Now here’s your scary stat for the day: Nearly 80 percent of all Americans live paycheck to paycheck, which means most of us are just one bad car accident or layoff away from financial ruin. And that’s not a good financial or mental state to be in because financial insecurity is a leading cause of mental stress. You may not realize how tenuous your situation is if you have a good job, but “life” happens, with its share of illnesses, accidents, layoffs, etc. And if misfortune strikes and you lose that job, your quality of life can quickly unravel—for you, your spouse, and your family. So protect yourself by not living paycheck to paycheck, by maximizing your savings and reining in your “wants”, and have enough liquid money to cover at least 6 months of basic expenses like mortgage, insurance, utilities, and food.
- Good savers are honest with themselves. Let’s face it—none of us is getting any younger, that’s for sure. Yet so many people live in denial of this basic fact of life. The truth is that each of us has risk factors that could affect our financial security. Good savers are honest about their particular risks: advancing age, tenuous job security, chronic health problems, family issues, etc., and plan their savings to account for such risks.
- Good savers do not feel entitled. Too many people also have this attitude of entitlement. They get caught up in telling themselves, “I work hard, so I should have this because I earned it.'” But if you buy that nice car or day at the spa every week, by taking money away from your savings, then you simply must not do it, no matter how hard you work or how strongly you feel you deserve it. I am all for indulgences, but just make sure your indulgences do not take away from your savings rate.
- Good savers use online savings accounts and credit unions. As I said last week, technology is a powerful tool, and it’s up to you to use it for or against your own financial well-being. So hop online, search for phrases such as “using online tools to save money” and read the many fantastic articles on apps, programs, and features that can help you take advantage of deals offered online, such as online banks that often offer better interest rates on deposits and lower fees than traditional brick-and-mortar banks.
- Good savers make saving easy and automatic. Remember how automatic bill pay allowed you to forget the pain of paying your bills? Well, it works the other way too. Just as easily, you can automate your savings account by having a set amount of money directly go to your savings account through an automatic transfer on a certain day of each month or by using one of several new savings apps, such as Digit, hat help you sock money away for future expenses and your retirement.
- And, finally, good savers start small. I know I have thrown a lot of information at you on how to become a good saver, but there’s no need to get overwhelmed. You can always access this information on my website onthemoneyradio.org where I have links to this and other great articles on financial planning, savings, and investments. So don’t get intimidated; if you’re new to saving, just do two things to get started: start now and start small because it’s easier to adapt to a small change than to do a complete life overhaul. Begin by automating a small amount of savings each week and become accustomed to living off what you have left, then slowly increase the amount you deposit in savings each month.
I’d also urge you to share these tips with your family, perhaps by jointly going through these points on my website, so they too get a sense of why it’s important to save and how incremental changes can lead to a huge increase in savings over time. Moreover, by getting the family onboard, you’ll avoid the stress of having to explain and demand cost-cutting from them… and you’ll have a wonderful, reinforcing support system where your spouse, partner or kids too might come up with ideas on how they can get smart about saving more. If you have kids, I think you’d be doing them a huge life favor by getting them to understand the power of saving and investing and getting an early head start so the magic of compounding can kick in. Lastly, while making these changes will not be easy initially, I am pretty certain you will see tremendous value in doing this as you read your growing year-end savings statements, year after year.
I’d like to thank Charlotte Hilton Andersen of Reader’s Digest for putting together this important list.