Investing guru Warren Buffett said, "Do not save what's left after spending; instead, spend what is left after saving." It's a wise approach, but one that many of us have trouble following. The instant gratification of a latte, a craft beer, or even a candy bar can trick us into forgetting that saving comes first.
A survey by Slickdeals, a deal-sharing website, found that Americans spend $450 monthly on unplanned purchases. That translates to $5,400 per year and $324,000 over a lifetime. If you took that same $450 monthly and invested it for average annual growth of 7%, you'd have $1 million in your pocket after 40 years.
When you reach retirement age, that $1 million would be a game changer -- because all the lattes in the world can't calm the anxiety of being unable to support yourself. The good news is, even if you've neglected your savings in the past, you can make changes today that'll benefit you for years to come. Get moving toward that $1 million balance by implementing these five savings tactics now.
1. Redirect impulse buys into savings
Impulse purchases are hard to address, because we make them without thinking. One trick to being more mindful about your impulse purchases is to become a list-maker. Before you head to the mall or the market, write out a shopping list. When you reach for something that's not on the list, ask yourself why. Of course you can buy the toilet paper you forgot you needed, but think twice about the fountain soda or the four-pack of mochaccinos.
When you do catch yourself reaching for an impulse buy, jot down the item's price. Assuming you don't make the purchase, transfer that amount from your checking to your savings account. You could even do it on the spot if you have online access to your accounts. In just a few weeks, you'll see how those impulse purchases have been affecting your finances.
2. Automate your savings
Follow Warren Buffett's advice and save first, before you spend. Do this by setting up automatic transfers from your checking account to your savings account. Time these to go through the same day you deposit your paycheck. That way, these savings deposits will feel like a payroll deduction.
3. Invest for higher returns
If you follow the steps above, you will see your cash savings increase. That's great progress, but you'll want to manage that cash balance carefully. Here's why. A high-rate cash savings account might pay you 2% annually. But invest that money for the long term in low-cost mutual funds and you stand to earn 6% or 7%. Over 20 or 30 years, the difference in your earnings can be substantial.
You should keep enough cash on hand to cover three to six months of your living expenses. Consider this your emergency fund that you'd tap into if your income decreases or your expenses increase unexpectedly. Any savings over that six-month expense target should go into a tax-advantaged retirement account or taxable brokerage account -- where you can invest it for higher returns.
Tax-advantaged retirement accounts include your workplace 401(k), a Roth IRA, or a traditional IRA. Once you reach your target emergency fund balance, you can reduce your cash savings transfers to make room for higher 401(k) contributions. You can contribute as much as $19,500 annually to your 401(k). You can also contribute up to $6,000 in your IRAs, or $7,000 if you're 50 or older. Roth IRA contributions are subject to income limitations, but traditional IRA contributions are not.
4. Increase savings contributions annually
Put a recurring appointment on your calendar to review your savings progress at least annually. If possible, time your savings review to coincide with your annual raise. Points to cover during this savings review are:
Given my latest raise, how much more can I contribute to my retirement account?
How's my emergency fund tracking? Should I stop funding my emergency fund and increase my retirement contributions instead?
Are my invested funds growing in line with the stock market?
How much did I save in the last 12 months? How does that compare to my take-home pay? (If you are saving 15% to 20% of your take-home pay, you're on the right path.)
5. Reward yourself
People who are on diets often reward themselves with cheat meals to break up the monotony of their restricted meal plans. You can employ the same strategy to keep yourself motivated about saving. Set milestones for yourself and establish a reasonable reward for reaching those milestones. You could, for example, treat yourself to a massage or facial when you reach your emergency fund target balance or max out your IRA contributions. Or you could allow yourself a low-cost impulse purchase, like that latte, once monthly.
Saving and spending don't have to be at odds with one another. Warren Buffett would agree: You can do both as long as prioritize saving first.