Saving money is boring. It’s unsexy, uncool and the alternative is way more fun. It also provides zero instant gratification, which is probably why our generation is so shitty at it. The thing with saving money though, is that it’s kind of like losing weight. You can’t just go on a crash diet and expect to see long term results. You need to make permanent lifestyle changes that are easy to keep up with. Luckily, unlike with losing weight, we have the ability to automate our savings. We can set up our finances in a way to automatically put away a healthy amount of money each month without having to think about it. Below are a few tips on how you can automate your savings today.
By two accounts, I mean two accounts at two different banks. One will be your regular checking account that you use to withdraw money or pay bills, the other will be a checking account that you literally never touch. The reason you want these at two different banks is because it’s too easy to transfer money between your savings and checking account when they’re at the same bank. The point here is to make it as hard as possible for you to touch that money. Try to set at least 10% of your salary into the account that is dedicated for saving. The rule is, unless it’s a life or death emergency, never take any money out of this account. This is not a ‘weekend Vegas trip or summer vacation fund.’ Think about this as a tax you are paying to yourself. Get accustomed to living off of the remaining bulk of your salary.
Basically participate in any program your company offers that takes money out of your paycheck and gives it back to you at a later date with interest. The contribution limit for a 401k and ESPP (Employee Stock Purchasing Program) is $17,500 and $25,000 a year, respectively. Realistically, you probably won’t contribute the maximum, but try to get as close to it as possible (I’m talking at least 10%-15% of your salary on each). Your smug co-worker might tell you not to invest in your 401k because you can probably get higher returns doing some other investment, but you just go ahead and tell him to fuck off. Because even though this may be true, realistically, when you get the extra money in your paycheck, you’re just going to want spend it. Eliminate this urge by not giving yourself the option of touching it. Also, investing that money, tax free, will build your net-worth a lot faster and you’ll feel good about yourself.
If you make less than $114,000 a year, you can and should put up to $5,500 a year in your Roth IRA. Set up your accounts so that your Roth IRA automatically deducts money from your checking account (the spending one, not saving one) a couple times a month, preferably once after each payday. Setting up automatic deposits into your retirement account is crucial because it is very easy to “forget” to make a deposit or “need” an extra couple hundred dollars this month so you’ll make it up next month. We both know you won’t be making it up. So find a number you can afford to put into retirement every month and stick with it. Think of it like a car payment. No matter how tight money gets, your retirement account still needs to get paid. Except in this case you’re paying into yourself instead of into a depreciating asset. If you haven’t reached $5,500 by the end of the year, deposit the remaining amount in one lump sum (by April of the following year).
People tend to enjoy doing things more when they’re good at them. People also tend to not like to do things that they suck at it. This is probably why you see so many buff dudes at the gym with no leg muscles. If you’ve never really practiced saving in your life it can get very discouraging when first starting out. Building up that nest egg takes time so it’s important to track your progress. Take a snapshot of your total net worth each month so you can measure how quickly you’re improving. Additionally, it’s a good idea to keep a monthly snapshot of your expenses as well. This will help you figure out which spending habits to curb and it will also allow you to budget realistically. If you spent $600 on eating out last month, it’s probably not ideal to budget only $200 this month. You’d just be setting yourself up for failure.
If you’ve been spending every dollar you make, converting to the auto-save lifestyle won’t be easy in the beginning, but I can promise that after a few months you will feel a lot more secure and a lot less stress. Prepare for your lifestyle change by expecting to live below your means because that’s pretty much what’s going to happen. And the closer your reality is to your expectations, the happier you will be. Additionally, once you get accustomed to living below your means, try not to raise it whenever you come into some extra money. For example, if you get a pay bump at work, try to allocate more into your “account for saving” or increase the percentage in your 401k. This is the safer bet, because once you raise your expectations, it’s really hard to bring them down.
Well, there you have it. Those are the tricks and mentality behind automating your savings. The real beauty of it though, is that now you can spend the rest of your money entirely guilt free. Meanwhile, you can’t get all your financial advice from reading lists on the internet. Go above and beyond by doing your own research and asking questions for anything you’re unsure of. Don’t be embarrassed if you don’t know how something works; you’d be surprised on what most people don’t know. How do credit card interest/bonuses work? How do taxes work? What’s an ESPP? What’s an index fund? The more you know now, the better financial decisions you can make for your future.