Tricks to Soften the Pain of Saving

This WSJ article by Jonathan Clements caught my eye:

My check register says my checking-account balance is perilously close to zero. Yet, in truth, there is $4,000 or $5,000 in the account. Sound weird? It is. But let’s face it: If we were all completely rational, we wouldn’t have any problems managing money — and we certainly wouldn’t have a negative savings rate in the U.S.

My oddball accounting started roughly a decade ago, with a letter from a reader. He told me that, whenever he wrote a check, he would round up the amount he deducted from his check register to the nearest dollar. His thinking: A secret stash would slowly grow inside his bank account, further padding his wealth.

At first blush, this might seem utterly moronic. But given that most of us struggle to save enough, it made entire sense to me — and I have been doing it ever since.

In managing money, we make all kinds of behavioral mistakes. We are overly confident in our investment abilities, despite abundant evidence of our incompetence. We fret too much over each investment, instead of focusing on our entire portfolios. We like to “get even, then get out,” hanging onto bum investments too long, in the hope we will recoup our losses.

But maybe our biggest problem is our lack of self-control. According to the Commerce Department’s Bureau of Economic Analysis, the U.S. savings rate was slightly negative over the past 21 months. That’s an alarming change from the 7 to 10 percent savings rate that was common from the 1950s through the early 1990s.

Indeed, a recent survey by Washington’s Pew Research Center found that 77 percent of Americans describe themselves as the type of person who “always looks for ways to save money” — and yet 63 percent concede they don’t save enough and 36 percent say they often or sometimes spend more than they can afford.

Need to sock away more money? Below are nine ways to cajole yourself into saving. And, yes, I’ll readily admit it: I use many of these tricks myself.

Every year, your top financial priority should be fully funding your employer’s 401(k) retirement-savings plan. What’s so great about a 401(k)? A chunk of your income avoids immediate taxation and you get tax-deferred growth and possibly a matching contribution from your employer. But maybe more important, a 401(k) involves forced savings. The money comes straight out of your paycheck, so there’s no agonizing over whether to save or spend.

You can also compel yourself to save by arranging to invest automatically in your favorite mutual funds. With these plans, your monthly $20, $50 or $100 fund investment is deducted directly from your bank account.

As an added bonus, fund companies like T. Rowe Price Group and USAA Investment Management will waive their regular $2,500 or $3,000 investment minimum if you sign up for an automatic investment plan. Also check out the AARP Funds, where the usual minimum is a mere $100 and automatic investors can open an account for just $25 a month.

To sneak in a little extra savings, try rounding up your required monthly mortgage check to the nearest $100. You’ve got to write the check anyway, so it isn’t any great bother to make it, say, $1,500 rather than $1,432. These extra-principal payments will reduce your loan balance, possibly saving you thousands of dollars in interest over the life of your mortgage.

Make it a rule to save any money you receive that’s out of the ordinary, such as tax refunds, overtime pay, year-end bonuses and insurance reimbursements for health-care expenses. Because these windfalls aren’t part of your regular salary, they’re a relatively painless source of extra savings.

You may also get a windfall in the form of an annual salary increase. If you aren’t currently saving enough, force yourself to sock away part of the increase. You might boost the percentage of salary you contribute to your 401(k) or crank up the sum you save each month through your mutual-fund automatic investment plans.

Want to save a little more this month? As soon as you get your paycheck, decide how much you will salt away and then immediately send off the money to one of your mutual funds.

Many folks, I believe, get savings backward. They set out to cut their spending and then save whatever is left. But the odds are, the money they hoped to save will somehow get spent.

That’s why you should send off your savings as soon as you get paid. The money will be gone from your checking account — and you will be forced to live on whatever remains.

The danger, of course, is that you don’t trim your spending and instead start piling up the credit-card charges. What to do? You could use a debit card instead.

Alternatively, when you charge an item on your credit card, you might deduct the sum involved from your checking account. With any luck, that will encourage you to be more restrained in your spending, while also ensuring you have the money to pay the credit-card bill when it arrives.

If that doesn’t do the trick, try a cash diet. Decide how much you will spend over the next week or two, make a single cash-machine withdrawal for the sum involved — and then limit your spending to that amount.

Consider using the check-register self-deception I described above. You might even add a few wrinkles.

For instance, my checking account earns interest every month, I get reimbursed for the fees charged on cash-machine withdrawals and I receive a small amount of cash back on debit-card transactions. When I balance my checkbook, I don’t include these sums, instead leaving them as part of my account’s invisible balance.

One of these days, I will calculate my true account balance and send the accumulated surplus to one of my mutual funds. But for now, I am happy to let the surplus continue accumulating, knowing it’s another way I am saving money and knowing I have a sizable financial cushion, should I suddenly need to write a large check.

To be sure, such tricks are a little silly. But they make saving money a whole lot easier — and, as my nest egg balloons, all the silliness has started to seem awfully sensible.

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