10 ways to boost your savings.
1. Set a Target Savings Rate Before Setting Your Budget
When most people create a budget, they start with their expenses. Then, they think about saving whatever is left over. That’s like continuing all your current eating habits when you’re trying to lose weight. It misses the point: to cut.
Instead start with a target savings rate, the higher it is, the faster you’re able to build wealth.
For example, consider retirement savings. Today’s investment advisors recommend a 15% savings rate for adults looking to work a normal 40- to 45-year career, followed by a 20- to 30-year retirement with a 4% withdrawal rate. See this piece on TheBalance for some of the math and reasoning behind that 4% rule.
But what if you don’t want to work for 40 to 45 years? Simple: Increase your savings rate to lower the number of years you have to work. I’ve seen teachers who retired before turning 30 by saving and investing 75% of their income.
The first step is setting a target savings rate. Pick a percentage, look at what that leaves you to spend, and then budget your expenses based on that figure.
2. Automate Your Savings
Remember, saving more money is a behavior problem. The more you rely on discipline to save, the less likely you are to meet your target savings rate.
Instead of relying on yourself to only spend a certain amount, get the money out of your checking account before you can spend it. My favorite technique is to set up automated recurring transfers to take place every time you get paid. On payday, you get a direct deposit, and within 24 hours, there’s an automatic transfer to your brokerage account, savings account, or debt you’re trying to pay down.
Another way to corral your future behavior is by putting your savings or brokerage account a little further out of sight and out of mind. Set your savings or brokerage account up at a different bank or financial establishment than your main checking account so you don’t see it on your dashboard when you log into your checking account’s online banking.
If you’re investing in equities, set up automated investments to take advantage of dollar-cost averaging and reduce risk in your stock portfolio. It’s the same principle at work: Automate the “right thing to do” so that you don’t get skittish or greedy and tempted to try to time the market.
Easiest of all is automating recurring payments to pay down your credit cards and other high-interest debt.
3. Pay Off High-Interest Debt ASAP
I know I said earlier that savings isn’t a math problem, but here’s a math problem to consider: If you have credit card debt at 24% interest, and you have an investment opportunity you expect will earn 10% ROI, should you put your savings toward paying off your credit card debt first or investing money first?
It’s not a trick question. You have an effective return of 24% by paying off the debt, compared with a possible return of 10% on the investment. Do everything you can to pay off the credit card debt as quickly as possible. The interest you pay by carrying a balance is lost money – money that you can’t put towards building wealth.
If you have unsecured personal debt costing you more than 7% to 8% interest, prioritize it. Try using the debt snowball or debt avalanche methods, tried-and-true approaches to paying off debt quickly.
Secured debts, such as mortgages and auto loans, tend to charge less interest, making them a lower priority. Consider leaving them in place as you start investing money.