May I tell you a story? Two twin brothers, Robert and Kyle, had different saving patterns throughout their lives.
Responsible Robert saved $6,000 a year into his Roth IRA starting at age 32 and stopped saving at age 40 (9 years total). Careless Kyle didn’t save any money into a Roth IRA during the same time period. He began saving $6,000 in a Roth IRA at age 41 and stopped at age 49 (9 years total).
Here’s the interesting piece, they both saved the same amount of money ($54,000) over the same time period (9 years), but Robert started much earlier. When they both reached the age of 68, assuming a 6% return, Robert had $373,586 and Kyle had $221,125. Robert has almost twice the amount of money! This story illustrates the power of compounding.
3 Ways to Save More Money
Saving money is simple, but not easy. Before you can invest, you must be a saver. The earlier you save, the earlier you can invest.
If you find it challenging to save more money, here’s how you can do it.
- Auto Savings
- Set Aside Pay Raises and Bonuses
When it comes to putting money away, set up an automatic amount to be deducted from your paycheck. This can be used for many types of accounts, from a 401(k), Roth IRA, investment account, or savings account.
Once you enroll in an auto-savings plan, you likely stay in it over the long term and you will be in a much better financial position. The best part is, once you set it up, it keeps on working for you and you don’t have to do anything.
Set Aside Pay Raises and Bonuses
When you receive a pay raise or bonus, setting aside this increase in new-found cash is a way to increase your savings cushion. You can also increase your savings rate incrementally over the years by committing to set aside a certain amount of bonuses and/or pay raises.
Although it may be tempting to go out and buy something expensive to reward yourself, discipline goes a long way. Sometimes, individuals can become overconfident about their ability to repeat their success even though it may have been the result of external factors. This is a common human behavior.
Instead, having the self-control of saving your bonuses and raises will put you in a strong financial position. You successfully live 364 days a year without the bonus money, so one more day won’t seem like a lot.
It’s as straightforward as it sounds. You can use buckets for each task – 401(k)’s, Roth IRAs, 529 plans, Health Savings Accounts, etc. Be careful with the tax implications for each type of bucket. If certain buckets aren’t as filled as you would like, this will give you some hints on where to focus your savings efforts.
Saving money, typically a dull topic, is the first step to a successful financial future. I’m happy to chat with you about savings, money, or anything else. You know where to find me.