What’s your savings strategy?

by Nick on August 26, 2010

For those of you who have been here before, you may know that I’m a crazy saver.  I’m not quite sure it’s very healthy to be as obsessed with saving as I am (both in “not spending” and “good deals when spending” ways).  But that’s who I am.  And that’s probably why I write this blog. 

Here are three different strategies for saving.  Hopefully one or more will work for you!

Goal setting:
This one is simple.  Set a goal, make a plan and save.  The goal should be attainable.  The plan should be realistic.  And everyone who matters needs to be on board.  Many of you may have seen my goal (and plan) to save up and pay off my student loans by the end of 2011.  Goal setting is one way I save and I love it.  It’s fun.  I’m over 10% of the way there already and ahead of my plan! 

The only other note I would say about this is to make sure everything is written – all over the place.  Write your goal.  Write your plan.  Write your progress.  And write down why you want to get there when you want to get there.  It helps on the tough days – trust me.  I have my goals written all over the place with the exception of one (I have “vacation home” written on my desk at work, but not “retire early” for obvious reasons…).

Self rewarding plan:
The bottom line for this one is if you exceed your savings goal (in time or amount), you get to spend the rest on something you really want.

This one is for those who have a hard time saving in general or specifically with respect to certain investment.  For example, some people have a very high savings account balance, but no retirement savings. 

Here are two ways this one works:

First, for those who have a hard time saving in general, let’s say you would like to save $12,000 within a year but never can do it because you feel you work hard and want (or “deserve”) to pay for fancy coffee every day and wear custom suits.  Your plan may be to save $1,000 per month.  Your plan involves no suits or fancy coffee until you hit your goal.  After month two you have $3,000.  After month eleven you’re there!  You drank the coffee at work (got used to it, but didn’t like it).  You didn’t buy any new suits (turns out you had some you forgot about).  You sold stuff.  You never went to restaurants.  You saved like it was going out of style (NOTE: it’s not going out of style).  But you still have one months to go.  What do you do with the $1,000 in month twelve?  Whatever you want.  You deserve it.

and

Second, for those who have a hard time saving for a specific category (we’ll use retirement here).  We’ll use maxing out your 401(k) as an example – $16,500 this year.  That’s a lot of money!  But it’s pre-tax, so it’s not $16,500 out of your checks.  You call up HR and say “max me out!”  So every month they take whatever percentage of your salary equals $16,500 annually.  There is no hitting the goal sooner (unless you get a raise or bonus in the year) with this example, so you give yourself a prize at the end of the year for doing it (make sure you budget for this!  it’s not free money).

I don’t really like the self-rewarding plan because, to me, accumulating savings is a reward in and of itself.  But I know some folks need or want a little reward for hard work, so I mention it.  If this is the only way to get you to save, then it’s better than nothing.

Saving first:
There are many names for this (pay yourself first, auto-pilot savings, etc.).  And there are many applications of this, but essentially it covers “saving up for things to buy in cash instead of charging” or “adding to savings and investments with new money made before spending.”  I’ve spoken about both of these before a bit, too.

Saving up and buying things with cash is a great way to save money.  It’s one of the greatest, in fact.  With some items, like electronics, saving up first can get you either a lower price or better product (or both) because of how product cycles work.  On top of that you save because you didn’t pay interest if you charged it and paid it off over time.  On top of that you save because you may be able to negotiate a lower cash price (better than your credit card rewards).  And on top of that, you may be able to earn a slight amount of interest in an online savings account.  Let me count that up… looks like this strategy is win, win, win, win, if my math is right.

Adding to savings and investments before spending is also one of the best ways to save (and live on less than you earn).  You can slice up your check both before and after taxes.  Don’t be afraid to send it to as many places as you would like!  It’s ok.  Your HR folks will understand. 

So, feel free to tell your HR folks to contribute to your 401(k).  Start a Roth IRA and have that come out automatically.  Send money to an online savings account automatically.  Contribute to a 529 Plan automatically.  Anything else?

Then live on less than the rest.  Assuming that the percentages going to savings are significant (we’ve talked about some of these before but I’ll talk about them in more detail in future posts), you’ll likely be well on your way to retiring early with the life you want!

How do you save money?  What’s your favorite way?  Are there any others I missed?  And don’t forget to check out my ten favorite ways to boost your savings!

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