Humans are programmed for self-preservation. Ironically, that doesn't mean we're instinctively inclined toward wealth preservation.
Sure, some people are inveterate savers -- reveling in their ability to ignore consumerism and sock away 30% of their gross income. But then there are the rest of us, who manage to sock away just 4% of our income, according to recent savings rate figures.
We all know better. We might even think, right as we open our wallets, "I should really max out my IRA before I buy this dress/tool/Clapper, but ... I ... can't ... stop ..."
If consumption control is a problem for you, or if you just haven't developed the habit of saving, here are some tricks you can use to increase your net worth.
Trick No. 1: Hide it before you can spend it.
Out of sight is out of mind. When it comes to money, out of sight means in the bank -- and in sight eventually means out of the wallet.
So, put your money out of reach before you can spend it. This can easily be accomplished by signing up for your retirement plan at work. The money is deducted from your pay check and sent straight to your 401(k), 403(b), or 457, before income taxes are taken out. So, not only are you increasing your savings, but you're also reducing your taxes. If your boss matches contributions, then you're really losing money by not participating.
There are many other ways to hide your money from your inner spendthrift. Sign up for an automatic investment program, and money can be electronically transferred from your checking account to your IRA, a savings account, a dividend reinvestment plan (Drip), or a mutual fund that invests in money markets, bonds, stocks, precious metals, or real estate investment trusts.
Economics professors Richard Thaler and Shlomo Benartzi have come up with a twist on this "pay yourself first" strategy. Their "Save More Tomorrow" plan calls for people to increase their savings rate with every raise. So, if you're contributing 3% of your salary to your 401(k) this year, you'd then up your contribution to 6% when you receive your next raise. In a few years, you'll be contributing the maximum allowed.
Trick No. 2: Limit your spending power.
Automated teller machines (ATMs) make getting cash very easy -- which is very bad for your bottom line. Just take a look at your bank statements. See all those $40, $60, and $100 ATM withdrawals listed? Can you account for that cash? Probably not.
So, institute this rule: Decide on a minimum amount of cash you need for a week. Withdraw that amount on Monday, and do not make another withdrawal until the following week. If something important comes up, use your credit card. But knowing that you have a limited amount to spend over the course of the week will make you think twice before buying some random item that will temporarily sate your desire to consume. And anything that discourages spending is a boon to saving.
Trick No. 3: Pay medical and day-care expenses up front, and tax free.
Medical and dependent-care flexible spending accounts (FSAs) permit you to have a certain amount of money taken out of your pay check -- before Uncle Sam can take his cut -- for qualified expenses. The tax savings can be huge, especially for families who spend thousands every year on day care.
Just as with a 401(k), people in the 25% tax bracket will cut their tax bills by $250 for every $1,000 contributed to an FSA. But unlike retirement accounts, FSAs are also exempt from Social Security and Medicare taxes, which results in an additional $76.50 in tax savings per $1,000 contributed.
You do have to use all the money in your FSA by the end of the year, or you lose the money forever. So, be conservative when determining the contribution amount. But this is an easy way to save hundreds on taxes by paying for services and items that you would've had to pay for anyway.
And here's where the real savings trickery comes in. When you get that reimbursement check in the mail, don't go running off to Mohair Sofas 'R' Us. Deposit it in one of your many savings vehicles.
Trick No. 4: Pay debts forever -- but become the payee.
Many of us have some kind of monthly loan payment, whether it be a school loan, a car loan, credit card debt, a mortgage, or all of the above. The day will come when you send in your final payment. But unless that debt has been debilitating, you've been doing fine while making those monthly payments.
So, keep it up. Except, instead of sending a check to the lender, send the check to a savings, brokerage, or mutual fund account. You've increased your net worth by paying off the debt; now keep up the good work by building up your assets.
Trick No. 5: Paper the piggy bank.
You've probably heard of the old "save your change" strategy: Pay for everything with paper money, and put the change in a big jar. Once the jar is full, rent The Sound of Music, plant yourself in front of the TV, roll all your coins, and deposit them into your savings account.
This is a fine plan, but why not supersize it? At the end of the day, deposit all your change and your dollar bills. Maybe even throw in a fiver every once in a while. For years, you've been going to the corner coffee shop, not thinking twice about dropping a few bucks for something that'll add little more to your life than a rounder torso. "Hey, it's only three or four dollars," we say to ourselves.
Why not turn it around and say the same thing every day as we empty our pockets? "It's only a few dollars," you'd say as you deposit $3-$5 every day into your piggy bank, which will accumulate to well over $1,000 if you keep it up for a year.
If your preferred savings account isn't with your local bank, immediately write a check for the same amount of all your loose change, and send it to your retirement/college/emergency account after you've rolled the coins, counted the bills, and deposited the money at the bank.
Trick No. 6: Break windfall.
Every once in a while, a chunk of change falls in our laps. It can come from all kinds of places: a bonus, a tax refund, yard-sale proceeds, savings from mortgage refinancing, successful lawsuits against Disney for making so many mediocre movies despite its wealth of resources.
Oh, the excitement of found money! All the possibilities! We're not suggesting that you deny yourself a little indulgence -- a financial plan based solely on self-denial is doomed to fail. But here's a way to satisfy both the spender and the saver in you: From now on, break up every windfall into chunks. Use some for long-term goals, some for short-term goals, and some for immediate mad money.
Trick No. 7: Satisfy your spending lust.
Many of the reasons we choose to spend instead of save are based on emotion. We're bored, depressed, or upset that it's still five months until football season. When you feel the urge to spend your way to happiness, do things that will satisfy your desire for the new, the novel, the untasted, and the not-yet worn. Come up with a list of inexpensive things you can do instead of seeking mall therapy.
You know what they are: video, book, CD, and clothes exchanges with friends; dinner in a pillow fort in your living room; trips to the museum; camping; picnics -- whatever you enjoy. Stick the list in your wallet and pull it out every time you have the urge to spend money that you'd be better off saving.
For extra credit, join our one-month Fiscal Fitness '09 challenge where we're doling out daily money-saving tips that will put an extra $2,000 in your pocket.
For more Foolishness:
- Click, Call and Haggle Your Way to $1,365.07 In Savings
- One Heckuva Cheap Stock
- The 10 Hottest Stocks of 2008
This article was last published in June 2006. It has been updated to reflect today's economic realities.