By Camilo Maldonado
It’s no secret that many Americans have trouble saving.
Take a glance at the personal savings rates by country, and you will see that the United States doesn’t even crack the top 10 among developed countries. While the U.S. savings rate spiked early in the Covid-19 pandemic (when stimulus checks rolled in and it was hard to go out and splurge), it is now falling back to its normal dismal level.
If you’d like to buck that trend and set yourself up early for financial success, here are five powerful—but practical—steps you can take to jump-start your savings.
For many young professionals, it’s hard enough to predict what they’ll be having for dinner after work, let alone how much money they will need to retire in 35 or 40 years.
Thankfully, you don’t need to know exactly where the ultimate finish line is to set specific short- and medium-term savings goals. Setting highly specific goals and writing them down is a common-sense productivity hack that works—one study, for example, found individuals who write down their goals are 50% more likely to achieve them than those who merely think about them.
Start with the big picture, then get specific about what you need to do to get there. If you’d like to purchase your first home, look at neighborhoods you can see yourself living in and see how much homes you might buy there cost. Now you have a basis for writing down how much money you think you’ll need to save for a down payment. Despite the high cost of housing, it might turn out to be less than you think: According to the National Association of Realtors, the median down payment for buyers under 30 is 6% of the purchase price. Plus, you may be able to get a Federal Housing Administration mortgage with as little as 3.5% down.
You can do this for everything you’d like to save for, and it will serve as the first step for you to create a plan and budget to get there.
When you’re seated in an airplane awaiting takeoff, you’re always told that in case of an emergency you should put your own oxygen mask on before assisting others. Take the same approach when it comes to saving.
The way most people save money over a pay cycle is that after their check hits their bank account, they first use it to pay their recurring bills and other expenses. Then, at the end of the month, whatever is left may be saved. That’s akin to putting on your oxygen mask last.
Instead, pay yourself first, by immediately setting money aside for savings as soon as your paycheck hits your bank account. In practice, when you create your monthly budget, you’ll determine how much you can afford to save and set it aside on payday. This simple behavioral shift will ensure that you will consistently hit your monthly saving goal. When money isn’t sitting in your account begging to be spent, you’re less tempted to make unplanned purchases.
What if there’s not enough room in your monthly budget to set aside for those savings goals? You are the CEO of your money and you need to take charge, crunch the numbers and make some decisions, just as an executive would. The majority of expenses that keep you from setting aside enough money are likely recurring ones—everything from rent, utilities and food to cell phone, internet and cable services. Some of these fixed expenses can take a real effort to cut, but once you do it, the payoff is big. While you’re saving to buy a house or condo, could you be renting a cheaper apartment or even taking on a roommate to cut your costs?
There are smaller recurring expenses where savings, once you find them, can collectively add up. Instead of a big cell carrier, perhaps you can switch to an MVNO—that’s a mobile virtual network operator like Cricket Wireless or Mint Mobile that piggybacks on the big guys’ networks to offer cheaper service. If your cable bill is out of hand, consider joining the millions of cord-cutters who rely on lower-priced streaming services.
Now that you’ve freed up more money to save each month, make sure you do so by automating the savings act. From a behavioral standpoint, humans are wired to seek short-term gratification, which is at odds with long-term goals like saving for the future. Plus, you’re busy with your career and the rest of your life.
Put bluntly, the less you rely on your daily actions and impulses to save, the more likely you will be to save effectively and consistently. One simple act: Log into your job’s benefits portal and have your paycheck automatically split and deposited into two separate bank accounts—one for saving and one for spending. Another automatic and painless way to accumulate extra savings is to use a round-up app, which rounds up your purchases and then transfers the extra pennies to a savings or investment account.
You can also leverage automation in other parts of your financial life by setting up automatic payments for your credit cards and other credit-related accounts like car payments and student loans. Missing payments wastes money on late fees and high interest and can negatively impact your credit score—and that, in turn, could leave you stuck paying a higher interest rate and thousands of dollars in extra interest when you do take out a mortgage to buy that house.
There’s a good chance, if you work for a medium-sized or large employer, that you’re already contributing some of your salary to a 401(k) or similar plan and that your employer is matching some of your contributions. In fact, you might even be saving for retirement without having thought much about it. That’s because, thanks in part to the work of Nobel Prize-winning behavioral economist Richard Thaler, who pioneered the idea of automating savings, Congress has encouraged—and employers have increasingly adopted—automatic enrollment into 401(k)s. In this system, unless you opt out, you’re signed up to contribute 3% or more of your salary to a pre-tax retirement account which is invested in a default option—usually a target date or lifecycle fund which allocates your money based on your age. That’s not a bad investment option for younger workers saving for retirement.
But even if you’re already participating, it pays to give your 401(k) an annual tune-up, reviewing your investment allocation and fees and your contribution level—and particularly whether you’re contributing enough to capture your full employer match. If you find you’re contributing more than needed to gain that match, consider using some of those extra retirement savings to fund a Roth IRA, which has a number of advantages, particularly for young savers.