Saving is probably the hardest thing to do in financial management, there is never enough money. By the time all the bills are paid, there is no money left...

But as we learned in our previous lesson about savings rate, the more we save the quicker we will be financially independent.

The best advice I read in respect to saving, came from the book from David Bach, who wrote the Automatic Millionaire and he advises to:

Principle of pay yourself first

What does that mean? It means try to move money from your paycheck, ideally before you pay tax on it and before it ends up in your checking account, to your retirement / savings / investment account(s).

To save money without paying income tax means in the US you need to take advantage of a 401K, 403B or a IRA. In other countries there may be similar tax benefits. You can typically set this up with your payroll department.

Photo by Kelly Sikkema / Unsplash

A number of employers have as benefits that they pay you a match to your retirement. For example at the company I work for they match 50% of my savings upto 6% of my salary. So if you'd earn 50k they would match upto $1500... Free money.

If you't don't have access to a 401k or 403B, you can use an IRA or Roth IRA. If you are in a higher tax income bracket would recommend an IRA, as you will save taxes now, your money and the gains grow tax free, but you will pay taxes later when you are retired where you typically are in a lower tax brackets. This also applies to your 401k/403B.

If you are in a lower tax bracket now (if you are in the beginning of your career for example) a Roth IRA is probably better, you will pay taxes now, but your savings and gains grow tax free and when you take it out when retired it is all tax free.

Now all the saving plans have contribution limits ($19,500 for a 401k in 2021), they do increase each year. But that does not mean you should stop when you max out your contributions to these various plans. You can still use income you have already paid tax on and save it, increasing your savings rate even more.

The key is to make these savings automatic. So ask your payroll department to automatically deposit part of your salary in your employers retirement plan. Some companies also allow you to direct deposit to multiple accounts. This is a great way to siphon part of your salary straight into a savings account or investment account, before it even hits your checking account.

Make saving automatic 

If you company does not provide a way to direct deposit to multiple accounts, than setup an automatic transfer with your bank to your savings account on the days your salary comes into your checking account.

Again make it automatic, so you don't have to think about it, out of sight out of mind. Hence the title of the book the Automatic Millionaire.

If you have not started saving yet, start with perhaps 5% of your salary or less if even that is stretching it. Try to get into the habit of saving. Then when you get  a payrise, add half or all of your payraise to your savings.

Always look for opportunities to increase your savings rate. Did you get a bonus? Move part of it to your savings. Every bit helps, every dollar in your savings acccount is now really yours and as a bonus will start to earn money for you.