This Savings Advice From Suze Orman Is Easy to Follow -- and Could Have a Huge Impact

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KEY POINTS

  • Having solid cash reserves could get you through a crisis debt-free.
  • Suze Orman recommends increasing your savings rate by 1% each year.
  • A similarly painless way to increase your savings is to bank your post-tax raise each year.


Sometimes, small steps can go a long way.

It's always important to have a solid amount of cash in your savings account. That's because you never know when life might throw you a curveball, and it's important to be prepared for unplanned bills or a period of unemployment (especially these days given all of the recession warnings that have been coming out).

But boosting your savings is easier said than done. This especially applies these days given how inflation is wreaking havoc on so many people's budgets.

If your savings need a lift, you could make yourself miserable by slashing expenses to boost them. But financial guru Suze Orman says there may be a better way.

Slow and steady is a solid approach

Let's be clear -- if your savings account is currently empty, or you barely have enough money to cover, say, a $500 expense, then you may need to go to some extremes to build up your cash reserves. That could mean curbing all non-essential expenses for a period of time, getting a second job to boost your earnings, or doing both at the same time.

But let's say things aren't that dire. Let's say you have a decent level of cash reserves but you'd feel better having more. Or, let's say your emergency fund is in good shape but you need to do better about building long-term savings. In that case, Orman says that increasing your savings rate by 1% every year could go a long way.

So, let's say you currently earn $60,000 a year and save 2% of your income, or $1,200 a year. What you'd aim to do is save 3% of your income next year, 4% the year after that, and so forth.

If you go that route, you can adjust to that gradual drop in spending money (assuming you don't get a raise -- if your pay goes up enough, you might not lose out on available cash at all). But you can also make a big difference in your savings over time.

Another option to look at

What makes Orman's advice fairly easy to follow is that you won't be resorting to drastic measures to boost your savings. But a similarly easy approach could be to aim to save your post-tax raise every year.

Let's say your $60,000 salary gets boosted to $62,000 next year. That doesn't mean you'll keep that extra $2,000, because you'll owe a portion of it to the IRS. But, let's say that after accounting for taxes, you're left with an extra $1,600 a year. If, instead of spending that money, you pledge to save it all, you'll do a great thing for your finances without having to struggle. The reason? That extra cash is money you're not used to living on, so it shouldn't be very difficult to part with.

In fact, the takeaway here is that the more painless you make the process of saving money, the easier it should be. So whether you decide to save your raise or boost your savings rate by 1% a year, the key is to find a method that works for you logistically and mentally.

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