Want to save more money? Maybe for a house down payment or a newer car?
Then don’t make these mistakes.
Here are some of the more common mistakes we make when trying to save money:
1. Not starting sooner and re-addressing needs when life changes. Individuals should be saving as soon as they land their first job.
When they marry and become parents they should re-address their savings goals based on their changing needs and wishes for their children.
Not starting soon enough has a huge effect on your ability to save enough for your goals. There is no second chance at retirement or college. You either have the money when you retire or you don’t. You either have the money when your kids hit 18 or you don’t.
You need a lot of time for the power of compounding interest to work it’s magic.
2. Not taking advantage of free money from the company 401K. This could mean throwing away several thousands of dollars over the life of your career. I know some 401Ks have fees that are probably too high. But it’s not a horrible place for people to save. And if there is free money involved then it’s just stupid to pass it up.
3. Thinking that you can get away with saving less than 5%. Based on a salary of $50K, saving 5% of your salary (at a generous 8% rate of return) will only get you $750,000 over 40 years. Not considering inflation and taxes, you’d be safely drawing 4% (or $30K) each year, or just 75% of your current salary. Strive for 10%, or even higher if you are getting started later.
4. Not taking advantage of free money from tax-advantaged retirement accounts like your 401K, Roth IRA, etc. The consequences of such a move are several thousands of dollars in income taxes that you’ll pay that you could have avoided. The government has created these accounts to encourage you to save. So take full advantage. Open a Roth IRA today.
5. Not paying yourself first. It’s important not to wait till the end of the month to stash money in savings. It’s easy to find a way to spend it all. Trust me, you will spend it all most months. One of the first lines on your budget should be money owed to savings.
6. Not making savings automatic. By making your savings effort automatic (either through direct deposit or automated withdrawal) you ensure that the saving process will take place, regardless of your will power or time available. Without automatic savings, your savings efforts will be sporadic at best.
7. Not keeping savings in a separate place. It’s important to segregate spending cash from savings and investments. Co-mingling the funds (or even having them in attached accounts) makes it hard not to touch the funds in a moment of weakness, which we all have.
A great place to stash your extra savings is in an online savings account. While the interest earned isn’t great these days, it’s still better than traditional banks and because it’s online only, your money is harder to get to. In the world of saving money, that’s a good thing.
If you’re not saving enough money, don’t beat yourself up. It’s likely not your lack of will power or work ethic that’s to blame. You simply might not be using the right systems and making the right choices (even little choices) to make your savings effort stick for the long run.
What mistakes have you made when trying to save more money?