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Take a Pay Cut to Save More

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The most basic of financial tenets -- the "emergency account" -- is making a strong comeback. It's no wonder: The old-fashioned way of patching over surprise expenses -- a.k.a. putting it on plastic -- is becoming less tenable as lenders continue to slash spending limits, and actual emergencies fail to cooperate by putting themselves on hold.

If you need to amass a cash cushion quickly, you've got three choices:

  • Increase the amount of money coming in (by getting a second job, selling your beloved collectibles, or asking your kids to pay rent).
  • Decrease the amount of money flowing out (by downsizing expenses in your major budget categories, such as food, entertainment, or hair products).
  • Trick yourself and your loved ones into stashing money into an only-for-emergencies account.

That last option sounds pretty good, right? Here's how to save in a back-door, sneaky kind of way:

Step 1: Take a pay cut. Yup, you read that right. Successful saving requires giving yourself less money to spend. Unless you already live a monastic way of life, you can probably get by on less without even noticing. As they say, out of sight, out of mind.

Right now, pick a dollar amount you can bear to part with every paycheck -- don't overthink, just come up with a figure (and don't be stingy). There you have it! You're one-third of the way through your savings plan.

Step 2: Make saving automatic. Set up a savings account that's separate from your regular checking account. Now set up a recurring monthly automatic transfer from your checking account into this new account, in the amount you picked just a moment ago. And, no, keeping that money in your checking account and promising not to spend it is not acceptable. You want a completely separate account -- even better if it's inaccessible by debit card. That way, it'll be less tempting to break in and blow the balance.

Step 3 (extra credit!): Supersize your balance. Find a savings account that earns the most interest. Depending on when you need to access the money, we're talking about a high-yield savings/checking account, a money market account or fund, a certificate of deposit, or bonds, the pros and cons of each which are described in "Where to Park Your Cash."

Now sit back and let your emergency account bloom.

More no-sweat savings advice:

Dayana Yochim can't help occasionally sneaking a peek at her emergency savings account. The Fool's disclosure policy keeps writers honest about everything else.


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