"When I sit down with many of my clients to review their income and expenses, they're amazed at where their money actually goes," says Prior Lake, Minnesota, CPA Steven Mangan. “Once you know what you have, you’ll be amazed how much you can save.” Many people spend whatever money is available, without a firm plan to save any; others, despite their intentions to save, periodically forget to make that monthly transfer into savings. One trick to help you get some money into savings is to have your paycheck deposited directly into a savings account, rather than checking. You can still transfer everything you need into you checking account, but the extra sits in savings where it’s safely out of sight and out of mind. This can help you hold on to the money that you might otherwise have spent without a second thought.
According to Mangan, there’s often a way to get extra savings -- free money, so to speak -- with every dollar that you deposit: “Tax-deferred savings plans that come out of your paycheck give you extra savings at no cost.” Let’s imagine two employees. Both make $4,000 a month and take home $3,000 after paying $1,000 in tax – a 25 percent rate. The first employee decides to transfer $200 a month into his savings account, leaving him with $2,800 per month to spend. The second employee takes advantage of a tax-deferred retirement savings plan at work. He puts $266.67 in savings before taxes come out. The taxman takes $933.33 from his $3,733.33 income, leaving him with the same $2,800, but with an extra $66.67 in the bank. Without spending any extra money, he saves 33 percent more. “Tax-deferred savings are an even better deal over the long run since you don’t only save extra money,” adds Mangan. “You also get to earn interest on the extra money over time, too, giving you even more earnings.”
As of May 2013, the typical American household carries around $3,300 of credit card or other consumer debt. At an average rate of 14.95 percent, that debt costs you almost $500 in interest per year. If you can pay a little bit extra on your credit cards, it can help to alleviate your debt. Once you pay the debt down, take the money that you’re spending on your credit card payments and put it right into your savings account. You won’t be spending any more money, but you’ll be building up savings that enrich you instead of enriching your credit card company.
For example, suppose you owe $1,000 at 14.95 percent and have a minimum monthly payment of $21.12. At that rate, it’ll take you about six years to pay it off. Paying an extra $23.88 per month – four or five lattes -- will bring your total payment to $45 a month, which pays off your balance in 26 months. If you then take that $45 a month and add it to a pre-tax savings program at work, you’ll be able to sock away an extra $60 a month without losing any of your disposable income.
Many new savers start with a simple account like a bank savings account or money market account. These accounts are easy to use, but they don’t pay much interest. “Strategically choosing where you put your money is key to making it work hard for you. If you’re leaving it in savings for the long-term, invest it for the long-term at long-term interest rates and reap the benefits,” advises Mangan. For instance, if you know that you won’t be touching the money for at least a year, put it in a one-year certificate of deposit where it will earn slightly more interest. If the money will be sitting for a very long time -- for example, if you're trying to maximize retirement savings -- consider stocks, bonds or mutual funds which offer higher long-term historical returns. If you're new to investing, however, you want to do your homework first, or consult a trusted professional.
Steven Mangan points out that there's no better time than the present to set your savings plan in action: “Money that you save today is worth significantly more for you than money you save tomorrow, since it has more time to compound and grow and create more money that compounds and grows.” Every day you save is an opportunity to build more money. Mangan adds that “you’ll know when you’re on the right path when you’re maxing out your at-work contributions, you have three to six months' of salary sitting in the bank as an emergency fund, and you’re adding to it.”