Saving for retirement is a difficult task. That’s why pension plans exist, to automate both saving and investing.
We tend in the United States to save very little. The current personal savings rate is an abysmal 3.9%. It has trended downward from 12% in the early 1980s, but that is mostly a reflection of high interest rates at the time.
People in developing countries save about twice as much as we do. That’s also a quirk. In many foreign countries there just isn’t access to safe, reliable market investments. They also save more because credit is expensive or simply unavailable.
If you expect to retire on time, and we all hope to dictate those terms when the moment comes, you should save far more. Ten percent is a good target when you are young. If you’re mid-career and just starting to save, you might need to bump that number higher.
Getting started is half the battle. Here are five steps you can take to save more:
1. Cut one big thing
Financial advisors often suggest that you cut out the daily $4.50 latte, that is, to attack the pennies leaking from your accounts. That’s good advice, but it might be easier and faster to cut a whole category of spending instead.
You could swear off eating out, for instance, cut your pay TV subscription and get an antenna, or maybe sell a second car. Nothing about this path is simple, but you will spend less now and every month as a result.
2. Change habits
If big-and-fast seems too hard, aim for the lattes in your life. Download your online bill payments or crack open your checkbook. Chances are, you’ll quickly find those repeated expenses that eat into your cash. Identify three or four and take the pledge: No more!
3. Automate savings
If the first two don’t seem possible, attack the problem at the source. Its hard to dam a raging river but easy to divert a stream before it grows deep and swift. Set up an automatic transfer from your checking account into savings, then try hard not to look at your savings balance.
4. Join your 401k or 403b
Still too hard? If you have access to a 401k or other workplace savings plan, talk to your human resources rep about starting or increasing your contributions. Chances are you already have an account but don’t put in much. Maximize, and enjoy the break that comes with pre-tax savings and any company match you might have.
5. Contribute to an IRA
You might not have access to a workplace plan. If not, you can still get the tax break and still enjoy automated savings by setting up an individual retirement account. If you are self-employed, you can even set up a personal 401k with higher contribution limits than even workplace plans.
In the end, the less thinking you have to do, the better. Automation really is the niftiest trick if you know you need help saving.