Are you fretting about your lack of savings and the amount you're putting away for retirement? Well, me, too. I always do. Today I want to tell you the best way I've found to accumulate money beyond setting aside part of your paycheck each month. It's fairly easy and fairly painless, and it could total hundreds of thousands of dollars by the time you retire.

Easy as 1, 2, 3
Here are the three initial steps:

  1. Sit down. If you can get family or friends to sit down with you, the process is going to be much, much easier.
  2. Brainstorm and come up with as many ways as you can to cut at least $100 in expenses over the next year. (Charles Jaffe of MarketWatch recommends identifying eight ways to cut $500, because the resulting $4,000 is enough to fully fund a Roth IRA. I like that idea.)
  3. Over the course of the year, capture those saved expenses by dropping the money into a special savings account set up for this purpose.

Tips and other tidbits
If you don't know where to start, let me offer some suggestions. Most of these are fairly painless because they won't really lower your current standard of living:

  • Capture your next pay raise or bonus check and sock it away in the savings account. A 4% raise on a $50,000 salary will net you about $1,600 after taxes. That's a great start.
  • Eat out just one less time per month. If that saves you $50, that will turn into $600 by the end of the year. Instead of taking my family of four to a restaurant, I'll occasionally pick up gourmet, pre-packaged meals from Whole Foods (NASDAQ:WFMI) that are ready for the oven or the grill. Total cost: about $10.
  • Scan your recurring monthly bills to see what is sucking you dry for little in return. For instance, will it really affect you that much to cut back a tier on your cable TV plan or drop a movie channel? Sending $20 a month less to Comcast will save you $240. Don't forget to check your cell phone plan, too. Extra features and beefed-up minutes add quite a bit of extra value -- but to the bottom line of providers such as Verizon (NYSE:VZ) and Qwest (NYSE:Q), and not always to the user.
  • And really, how hard would it be to deny Starbucks or Peet's (NASDAQ:PEET) $20 each month for their coffee? Actually, it isn't very easy, I know. Both companies offer wonderful and addicting products. But if you can skip even just a couple of days a week and either bring your own java or brew some in your office kitchen, that's another $240 in the bank.
  • Add up the moola you shell out for lunch. Don't be surprised if it's at least $200 monthly. Bringing your lunch to work two or three times a week will not only save you a lot of money, but it will also mean healthier eating. Nothing wrong with Wendy's (NYSE:WEN) now and then; I eat there myself and love the salads. But bringing a healthy lunch will help you feel better and lose a little weight while you bulk up your retirement savings!

You (and your family and friends) can probably come up with several more ways of meaningfully cutting expenses -- and I'd love you to email me with your suggestions. As you go through the process, you'll come to appreciate and understand how highly efficient companies such as GlaxoSmithKline (NYSE:GSK) and PepsiCo (NYSE:PEP) provide consistent profits and outstanding returns to shareholders over the decades.

Now, put the money to work
OK, so you're going to start socking the money away. Now let me show you the potential payoff. Let's say you scrape together $4,000 each year:

Put your money in ...

Which yields*

20-year payoff

34-year payoff





Bank savings account




Index fund




Index plus a few




*Yields are approximate, based on historical data.

"Index plus a few" is a strategy that involves keeping most of your portfolio in an index fund. But if you have the time and skill (or the help) and want to add a little juice to your returns, you can set aside 5% to 10% for individual stocks. For some poetic justice, and to bring this article full circle, a basket of the companies mentioned in this article returned an average of 187% over the past 10 years, versus the S&P 500's 92%. Now that's how to make money off these great companies, rather than give it away to them!

Start now
Of course, you needn't have stock-picking skills to enjoy the advantages of indexing. But if you want to give it a whirl, a free trial to the Motley Fool Rule Your Retirement newsletter service will give you specific stock recommendations as well as mutual funds, bonds, and even savings accounts to consider. Here's more information on the 30-day free trial.

This article was originally published Jan. 13, 2006. It has been updated

Rex Moore captured his last pay raise, but it got away. He owns no companies mentioned in this article. Whole Foods and Starbucks are Stock Advisor recommendations. GlaxoSmithKline is an Income Investor recommendation. The Fool has adisclosure policy.