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6 Smart Savings Tips

Saving more money is usually at the top of most Americans’ financial resolution list. Many experts recommend saving 15% of your salary, which you can divide among different savings goals. The following tips can help you save smarter. Consider as many or as few of these as best fit your individual situation.

Your first savings priority should be an emergency fund, with three to six months of living expenses stashed away in a separate online savings account. An online account provides ready access should you need it, and usually offers the best interest rate. Making it a separate account also means you’ll be less likely to be tempted to dip into it. Start small, even if it’s only $25 or $50 a month, and keep adding to it. If you get a large tax refund or bonus at work, consider contributing a big chunk of it to jumpstart your emergency fund.

With health care costs continuing to rise, a Health Savings Account (HSA) provides a triple tax-advantaged benefit. The accounts require you have a high deductible health plan (HDHP). HDHPs offer lower monthly premiums but have higher out of pocket costs, and an HSA helps to offset these. The money you contribute to a HSA reduces your taxable income, grows tax-free, and withdrawals are tax-free too, provided you use them to pay for qualified health care expenses. These can include medical insurance deductibles and co-pays, as well as vision care and dental expenses. Plus, the money you contribute to an HSA rolls over from year to year, and stays with the employee, not the employer. So if you leave your current job, your HSA goes with you. Setting up a HSA now and building up contributions can be a good way to cover both current and future medical costs in retirement.

Pay off any high-interest debt you have. If you are paying 17% or more on credit card debt, make a plan to pay it off. Start with the card with the highest rate first. Pay as much as you can on it while still making minimum payments on your other cards. Once it’s paid off, keep going with the card with the next highest interest rate, until all the debt is paid off. It will get progressively easier as you pay down the cards because you’ll be saving money on interest, and you’ll have more money available for your other financial goals.

Saving for retirement comes next. If your employer offers a workplace plan, definitely take advantage of it, especially if your employer also makes a matching contribution. Why turn down free money? Typically, employer-sponsored plans like 401(k)s and 403(b)s have higher contribution limits, which means you can save more of your income and defer paying taxes on the portion you save through the retirement plan. The additional money your employer contributes can turbo-charge the growth of your savings. Here’s an example.

Let’s say you make $50,000 a year. Your company offers a match of 50¢ on every $1 you contribute, up to 3% of your salary, which is a common matching percentage. If you were to contribute just 5%, or $2,500, over the course of a year, your company would add another $750 (1.5% of $50,000). Your total annual contribution would now add up to $3,250. At an annual compound growth rate of 7%, your savings could grow to more than $51,296 in ten years. The best part? To save $2,500 a year only takes $104 per pay period. Consider gradually increasing the percentage of salary you are saving until you’re consistently contributing 10% of your salary or maxing out your contribution limit.

If you think you will be in a higher tax bracket in retirement, you may want to open a Roth IRA. Contributions to a Roth are not tax deductible, however, your contributions and future withdrawals are tax-free. 

Don’t forget to save for other financial goals. You can use a 529 plan to save for higher educational expenses for yourself, your children or grandchildren. Qualified distributions from a 529 plan are tax-free. For shorter term goals like a downpayment for a house, you can use CD ladders. You’ll be able to earn a higher rate of interest while keeping your money safe. Many banks now offer a savings account with the option of sub-accounts, that allow you to separate out goals, such as vacations or holiday spending. Once you’ve met one goal, such as holiday spending, you can focus on saving more toward your other goals.  

One last tip: To make it easier to stay on track with your savings goals, consider using direct deposit from your paycheck to your various savings vehicles, such as workplace savings plans, HSAs, IRAs,  or  taxable investment accounts. Then give yourself a pat on the back—you’re a tax-smart saver.

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