Most of us find saving difficult. That’s not surprising, as research shows our brains are hard-wired for immediate gratification. The flashy new car we can have right now has a lot more appeal than some vague notion of financial security later on. But there are ways to tilt the odds toward saving. Here are 10 simple but effective ways you can bolster your nest egg.
1. Meet Your Future Self: Research shows that we tend to save more when we feel connected to the person who’ll benefit from the money we’re putting away—i.e., our future selves. But how, you may ask, can the you of today to get acquainted with the you of 10, 20 or more years down the road? You can’t actually meet, of course, but there is a way to develop a connection of sorts by going to a tool like Merrill Edge’s Face Retirement, which you can find in our Retirement Toolbox. The process is simple: The tool takes a snapshot of you, runs some age-morphing software and then shows you what an older you might look like. This is no parlor trick. Researchers at Stanford have found that the people who go through such an exercise are more likely to save.
2. Lash Yourself to a Mast (metaphorically speaking): If you were paying attention in those classics courses, you’ll remember that at one point in the Odyssey Ulysses tied himself to the mast of his ship. No, nothing kinky. He just wanted to be absolutely sure he wouldn’t gravitate toward the seductive song of the Sirens and wreck his vessel on the shoals. Fortunately, you don’t have to resort to such drastic measures to save money. You can employ what’s known as a “commitment device”—essentially, a way of making yourself do something you want to do but may not do without being forced in some way. For example, by going to Stickk.com, you can commit to a savings goal of your choice—say, saving $5,000 over the course of a year. Your incentive to stick to that commitment? You agree beforehand that if you fall short of your goal, you’ll pay a penalty—maybe $100—to a person or group you don’t particularly like (say, a the NRA if you’re for gun control). You can use the same to set limits on your retirement spending. This technique worked for Ulysses, and it may also be able to help gain more control over your spending and saving than you otherwise would.
3. Go on autopilot. One of the most effective ways to save is to put money away before you can get your greedy little hands on it. Enroll in your 401(k) or other company payroll deduction plan and contribute at least enough to qualify for an employer matching funds. Don’t have a 401(k) or similar plan? Sign up ASAP for a mutual fund’s automatic investing plan that transfers money to a mutual fund from your checking account every month. Most fund companies offer such a program, many allowing you to participate for as little as $50 a month or so. While you’re at it, try to stick as much as possible to low-cost investment options. Doing so helps you in two ways: it boosts the size of your nest egg and also helps that nest egg generate substantially more income during retirement.
4. Save your raise. Instead of adjusting your standard of living upward the next time you get a raise, live at the same level you did before you got the salary boost and save the extra dough. This tactic can make saving at least relatively painless. Two well-known economists, Richard Thaler of the University of Chicago and Shlomo Benartzi of UCLA, have created a savings program called Save More Tomorrow based on this premise. Companies that have incorporated this program into their 401(k) have found that employees tend to save significantly more. If you’re retired, you can practice a variation on this theme. Typically retirees increase their savings withdrawals annually by the inflation rate to maintain purchasing power. But if a setback in the financial markets has significantly depressed the value of your nest egg, you should consider forgoing that inflation adjustment, or “raise,” in order to give your savings a better chance to recover.
5. Operate on a cash basis. A credit card doesn’t create the same feeling of separation from your money as shelling out cold hard cash. Result: It’s easier to spend more when using plastic instead of cash. Credit cards then boost spending even more by saddling us with high-interest rates and payments that can stretch out for decades. Avoid this double-whammy and boost your savings by setting your cards aside in a safe place and going “old school” with hard cash.
6. Time your purchases. You can save considerable bucks by timing your purchases—for example, buying your wardrobe when retailers are trying to unload the current season’s fashions. Just be careful you don’t trap of rationalizing excess spending because you’re “getting such a great price.” If you’re loading up on items that you can easily do without, you’re not saving no matter how good a deal you get.
7. Manage your debt. To the extent you must borrow—say, for a car, a home or college education—make sure you’re paying as low a rate as possible. Paying just one-half a percentage point less for a mortgage can save the typical homeowners upwards of $600 a year. And if you’re trying to pay down debt more quickly by making extra payments, be sure to focus first on loans that carry the highest rate of interest.
8. Get to know your kitchen better. According to Bureau of Labor Statistics’ Consumer Expenditure Survey, the average two-income family spends more than 40% of its food budget, over $3,600 a year, eating out. Eliminating this expense would be unrealistic. Sometimes we don’t have time to prepare a meal at home, and dining out occasionally is hardly extravagant. But by being more careful about how often you eat out and what you pay, you may be able to free up a few hundred to a thousand bucks or more a year that you can go toward savings or, for that matter, spending in more critical areas.
9. Keep car costs down. Buying, maintaining and financing a car is a major expenditure for most Americans. But by choosing a modest but perfectly serviceable car rather than a glitzy StatusMobile loaded with every conceivable option, you can easily save $10,000 to $20,000 or more on sticker price alone. And by checking out sites like Edmunds.com and IntelliChoice you can compare different makes and models not just on the basis of their purchase price, but by their total ownership cost, which includes depreciation, financing, taxes, fees, fuel costs and maintenance.
10. Make the tax laws work for you. With the top federal tax rate back to 39.6—and some households also facing a Medicare surtax of 0.9% and an additional 3.8% levy on net investment income—taxes can soak up a sizeable percentage of your budget. Fortunately, there are a number of perfectly legal steps you can take to lower Uncle Sam’s take, including contributing to a 401(k) and IRA and taking full advantage of deducting mortgage interest, property taxes, job-search costs, medical expenses and education expenses, just to name a few. If you’re relying on savings for retirement income and you have money in both a traditional tax-deferred IRA and a tax-free Roth IRA account, you may also be able to hold your tax bill down by tapping your Roth account when draws from your tax-deferred account threaten to push you into a higher marginal tax bracket. For more tax-saving strategies, you can check out these tips from TurboTax.