I know you’re supposed to put away 15 percent of your salary if you hope to retire at a normal age. I’m not panicking, but my wife and I are well below that mark. Bills just seem to eat up too much of our paychecks. What are some tactics used by people who save a lot of money? I don’t want to be working when I’m 80. — Leo, Newton, Massachusetts
If you’ve started saving money well before your 30th birthday, you’re okay diverting 10 percent of your income toward retirement, says Alicia Klein, a financial adviser based in Tucson, Arizona, and a member of the Alliance of Comprehensive Planners. But for everyone else — and it sounds like you’re included — you should really bump that number up to 15 percent.
It may give you some solace to know that you’re not exactly alone when it comes to a skinny investment account. According to a recent Bankrate survey, only 16 percent of Americans said they’re saving more than 15 percent of each paycheck for their post-working years. Twenty-one percent aren’t kicking in anything at all, which is a stark commentary on the state of affairs in America.
While the fact that a lot of families are struggling may be cold comfort. At some point — preferably sooner than later — we all need to take a hard look at how we’re saving. Otherwise, retirement as you envision it simply won’t be an option.
It sounds like you’ve had that epiphany already. So what next? Here are what financial advisers say are the best ways to ramp up your savings.
1. Track Your Expenses
Big shocker here, right? Klein recommends a simple exercise: writing down every purchase you make for two to three months so you can see where your money is actually being spent. Often, families discover that a big part of their budget is being flushed down the proverbial toilet. “You may find that you’re paying for Amazon, Hulu, and Sling, which is costing you $100, but you only use Netflix,” she says.
These days, consumers have access to any number of budgeting apps that let them track purchases right from their phone. For those who like simplicity, for example, Mint is especially popular. Consumers who are willing to drill down into the minutiae of what they’re spending often gravitate toward tools like You Need a Budget.
For Klein, any of the bigger-name apps can be effective for a given individual, helping them free up money that they can then squirrel away for retirement. “The best budget,” she says, “is the one that works for you and that you stick to.”
2. Trick Yourself Into Saving More Money
Once your paycheck hits your bank account, there’s a big chance you’ll use it for something other than your retirement account — and probably much less important, like a trip to the mall or a nice meal. So, don’t give yourself that temptation. If 10 percent of monthly earnings is automatically being diverted toward your 401(k) now, Klein recommends going up a notch to 11 percent. “It might feel tight for that first month or two, but you acclimate,” she says. “Then incrementally increase again until you reach 15 percent or whatever your target is.”
So how do you save money in a savings account when you’re struggling with the bills? Rodger Friedman, a founding partner at Steward Partners Global Advisory in Bethesda, Maryland, says he uses a similar approach for clients who are just starting on their nest egg. He tells younger workers to start by putting away 1 percent of their income, or $750 a year for someone making a $75,000 salary. “It’s just a cup of coffee a day,” says Friedman.
Over time he asks them to increase their contribution by one percentage point at a time. “Over the course of a year, they may be saving 3, 4, or even 5 percent,” he says. “It’s like getting into a cold pool one toe at a time.”
3. Keep a Lid on Your Credit Cards
As your career develops and you start making more money, your credit balances should go down, right?
Well, that’s probably the way it should work. Unfortunately, the exact opposite happens in real life. The average American under the age of 35 carries $5,808 in credit card balances, according to data compiled by the ValuePenguin. That number jumps to $8,235 for those in the 35 to 44 age bracket. It’s hard to bump up your 401(k) contribution when you have that kind of debt on your shoulders.
The best thing you can do is reduce that temptation. Rather than shoving a handful of cards into your wallet, limit yourself to one or maybe two, says Friedman. Cutting down on your collection of plastic will not only help you reduce the urge to splurge, but make it easier to track how much you owe.
Already have debt from revolving credit accounts? Pay down the ones with the highest interest rate first, says Friedman. There’s no sense in chipping away at a card charging 10 percent APR when you have another account costing you 25 percent a year in the meantime.
4. Hold Off on the BMW, at Least for Now
One of the surest ways to get off-track in the savings department is by overreaching on your bigger purchases in order to impress friends. If you’re behind on your investment goals, looking at your car payment is a good place to start. Klein says she has the same reaction whenever clients tell her about a bloated auto loan: “There’s your retirement savings — you’re driving it!”
Getting in over your head with a pricey house can be an even bigger trap. For most households, Klein recommends capping your home purchase to two or two-and-a-half times your annual income (though folks in pricier markets may have to stretch that a bit).
By keeping your mortgage payment realistic, you free up more money to spend on other needs — and you’ll tend to worry less about keeping up with the family next door. “It puts you in a neighborhood where most of the other people’s income will be similar to yours,” she says.