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- I aim to save money every single time my income increases, but the only way I can remove the temptation of spending it is through "hiding" it from myself in a variety of accounts.
- I'm not really hiding it - I'm just putting it into investments and savings accounts that will grow over time, like high-yield savings, a Roth IRA, and an HSA.
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In college, I got a job at the school paper that - if memory serves - paid $40 a month. I could, of course, have committed to saving some part of that money, but there were more than $40 of expenses each month that I could definitely stand to pay for … even if they were runs to the late-night donut store downtown or gas money to get rides home.
The point I'm making, however, is that every increase in income, however small, is an opportunity to save: After all, I was making it somehow before that $40, so it stands to reason that I could save some part of it. I've grown to see even the smallest increases in income (or decrease in expenses, like getting a cheaper apartment) as the most important moments of my life as a saver.
My goal now is to save a percentage of every single increase in income. When I was making very little, this was a small proportion, sometimes only 10% of really small increases. Now, I do my best to save 70% or 80% of a pay increase, taking only a small portion for a luxury or something I need. Once my basic needs were met, it became important to me to hide money from myself whenever possible. After all, we all can think of something to spend more money on … so if I don't have the money in my checking account, I simply don't spend it.
However, when I say "hide," what I'm more accurately doing is "investing." I'm moving my money to places where it will grow and (importantly) be too annoying to break into just for a passing desire. If I really need the money, most of it is available, even if a fee might be imposed. Investing more money each time my income goes up helps me to save more without feeling an active "pinch," as I feel when I have to reduce my expenses.
Here are the six places I hide money from myself.
1. A high-yield savings account
One of the most popular forms of saving is the emergency fund. You recognize the term: money that can help you avoid an expensive loan or credit card debt for those small-to-medium expenses that can pop up at the least opportune time. Experts recommend keeping three to six months' worth of living expenses in a high-yield savings account, sometimes more depending on your situation. My first move was to fill an emergency fund at Ally Bank, where my husband and I get somewhere around 2% interest on money that we try never to touch unless we are in a real emergency.
2. A Roth IRA
Roth IRAs pack a really great savings/investing punch, but you must be earning less than $122,000 as an individual or $193,000 as a married couple to contribute. In 2019, you can contribute up to $6,000 a year, plus a $1,000 catch-up contribution if you're age 50 or older.
With a Roth IRA, you pay taxes on your contributions now, as opposed to deferring taxes on contributions to a traditional IRA. Those contributions are invested through your Roth IRA and grow with the stock market over time, and they aren't taxed when you withdraw it in retirement. If you expect your income bracket to be higher later in life, paying taxes now can help you save. Plus, because you've already paid taxes on your contributions, you can take those contributions back out without penalty - although that rule doesn't apply to any investment earnings.
3. A Health Savings Account (HSA)
While I fully expect to spend this money over time, I also find it helpful to hide however much money is allowable in a Health Savings Account. If you have a high-deductible healthcare insurance plan, keeping a fairly solid amount of money in an HSA - which rolls over each year if you don't use it all - can give peace of mind for those expensive procedures that don't quite make the deductible.
"An HSA is a triple tax-free investment account," reports Business Insider's Tanza Loudenback. "Contributions are made pretax; earnings and interest on investments are tax-free; and withdrawals made for qualified medical expenses are tax-free. As such, it is one of the most powerful investment tools out there."
In 2019, a single person can contribute up to $3,500, a married couple can contribute up to $7,000, and people age 55 or over can contribute an additional $1,000 catch-up. You can use this money on a lot of things: orthodontia, vitamins at the drugstore, anything health-related. It's separate enough that I am not tempted to spend it, but easy enough to access to help me when I need medical or dental care.
4. A 401(k)
Experts often recommend that you should invest in your company's 401(k) at least up to the match, which is $19,000 in 2019. My husband's company does .5% for each 1% he contributes, up to 1.5%; that matching 1.5% is essentially "free money" if we are willing to save.
We choose to put a bit more than that in because it is a good idea to fill your 401(k) (or 403(B), or SEP IRA if you're self-employed) if you know you are likely to be in a higher income bracket than you might be in retirement, since these tax-deductible accounts reduce our taxable income and save us on our tax bills.
5. A 529 account
Recently, we've started a 529 account for a future child's education expenses. You do need a Social Security number to open one, meaning if you want to start it in the baby's name you must wait until they're born. But we figure starting it in my name before our kid shows up is a good idea because 1) Busy parents of newborns may or may not have the time to do it, and 2) We can transfer a 529 account from my name into the baby's name in the future with fairly little fuss. College doesn't seem likely to get cheaper in the next 18 years, so this seems like one way to start planning ahead.
6. A charity savings account
Our last place to hide our money is to have a whole savings account specifically for money we wish to donate. For a while, we were just donating out of our checking account when we felt the urge, but we realized that, overall, we weren't donating as much as we wanted to with this strategy.
Instead, we started an automatic transfer each month a couple days after a paycheck hits, that moves some money from checking into this charity account. This way, when we are feeling generous, we can look at that amount and that money is in effect "already donated," so we can be as generous as we feel (up to whatever is in the account) rather than worrying we are giving away next week's grocery money.
While we don't contribute equally to all of these 6 accounts, we use automatic deductions for each of them to make our checking account balance look lower. That way, we aren't as tempted to indulge; our spending tends to be eating at restaurants, traveling, and buying house gadgets, if we aren't careful. Each increase in income or decrease in expenses is mostly allocated to one of these six funds rather than just becoming "the new normal," which keeps us in check.
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