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How to Save More Money Next Year

by retirebyforty on December 30, 2013 · 27 comments

in retirement, saving tips

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It’s going to be a New Year in a couple of days and I hope you’re enjoying the last of 2013. Now is the time to make a few New Year’s resolutions and write them down. Two of the most common resolutions are to get fitter and to save more money. These two are on my list, too, and today is your lucky day because I will share a surefire way to save more money next year. You’re on your own for the fitness resolution. I will be struggling with that one, too.

how to save more money next year easy

A couple of weeks ago, I came across some research by Richard H. Thaler, a professor of behavioral science and economics at the University of Chicago’s Booth School of Business. Whew, that was a mouthful (if I was speaking.) Anyway, this research paper shows how you can save more tomorrow. This program is actually dependent on the employer to help you save more for retirement. We’ll just go through it first and then see what we can do at the end.

Save More Tomorrow (SMT)

The SMT plan has 4 basic components:

  1. Employees are approached about increasing their retirement saving contribution about 3 months before their scheduled pay increase.
  2. Once they join, their contribution automatically increases after their raise.
  3. The contribution continues to increase when they get another raise.
  4. Employee can opt out at any time.

Wow, you can see this would be a brilliant plan for an average employee. Most of us are NOT saving enough for retirement. It’s hard to increase our retirement saving because we would see an immediate decrease in our take home pay and that’s painful. The SMT plan is ingenious because of step 1.

Everyone wants to save more. We make resolutions and try our best, but our psychology works against us.  What step 1 does is to take our good intention and shove it out 3 months. Sure, I can save more in 3 months once I get a raise. I won’t see a drop in take home pay and in 3 months I’ll have forgotten about signing up for this automatic increase. The take home pay increase will be less than expected, but that doesn’t hurt at all compared to seeing the take home decrease.

Automated Increase

Another reason why this is a great plan is due to inertia. Most employees don’t increase their retirement contribution because it’s easier to not change anything. Every few years, the government increases the 401k and IRA contribution limit, but most people just leave their contribution the same or not save at all. This plan puts inertia in our favor by automating the increase. Most employees in the study left their SMT plan alone and they benefited because of it. They automatically saved more for retirement every year without having to do anything.

Disappointment

Oh, I’m not disappointed with the SMT plan itself. It’s a great plan, but I can’t believe I haven’t heard about this until recently. The SMT plan was first implemented in 1998 at a midsize manufacturing company and it went very well. Employees were able to save more and that’s a good thing. One thing to note is that the executives also benefited from the higher retirement saving rate. Only a certain percentage of the employer contribution can go to the executives and if the regular employees are not saving, then the executives won’t be able to maximize their retirement benefit either. So the executives also have a big incentive to put this plan into effect. What’s disappointing is that the SMT plan isn’t more common 15 years after its inception.

What can you do?

What can you do if your employer doesn’t offer the SMT plan? Well, you will have to get a little bit more proactive. At my old job, they had an annual review every year around this time. I would know if I’ll get a raise at the beginning of April. I’m sure you have a similar process at your place of employment.

What you need to do is to increase your retirement contribution as soon as you get the results of your annual review. Usually you won’t see the raise for a few more weeks and that’s plenty of time to get things set up. The most painless way to do this is to split the raise. For the present, you would get half of your raise and in the future, you get the other half. Of course, if you’re not hurting for cash, then it’s better to give your future self a bigger slice of the pie.

You won’t see a decrease in your take home and you’ll fulfill your resolutions all in one shot. Well, you shouldn’t be making a blanket resolution like “save more money.” See my tips on how to make and achieve your New Year resolutions to get on the right track. Unfortunately, this can’t be automated so don’t forget to increase your contribution when you get your pay increase letter.

Of course, many of us need a little push to get us going in the right direction. If you need professional help, then perhaps you can do a license search to find a qualified person. A certified financial planner would be helpful to get you started.

Does your plan have an automatic increase option? Don’t you think this would be helpful?

Farewell 2013 and Good luck in 2014! 

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{ 27 comments… read them below or add one }

jane savers @ solving the money puzzle December 30, 2013 at 4:34 am

While this sounds like a good plan and a way to limit life style inflation it does depend on a raise and a lot of us don’t get those. It would be good if employers could figure out a way to get everyone to participate in the pension plan. Too many of my coworkers let the employer match slip through their fingers because they don’t think they can afford to lose the money from their pay cheque every week.

I contribute to my employer pension up to the match and that number has not changed in a lot of years.

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Rose December 30, 2013 at 4:46 am

I’ve been saving towards retirement since my early 20′s, wanting very much to follow my parents’ example of early retirement. Besides maxing out retirement accounts as soon as we could afford to do so, we have a primary checking account from which we pay our bills, and only keep the amount of money in there that we need for the next couple of weeks when the next paycheck arrives, with the rest being sent to our money market account. Even though transfers are as easy as an electronic request, somehow those funds not showing at your ATM helps us to keep from spending it. And of course when the money market account gets too big the extra funds we don’t need for emergency funds or large upcoming purchases gets moved into investments, where they stay for retirement.

The key to saving, however, is being content with what you have. We have not raised our standard of living in 20 years, with the exception of course of improvements through improved technology, though we are not early technology adapters which means when we buy we get a better value. As raises come in, bonuses get given, they go straight to the investments. This has allowed us to live well while saving enough to send our two kids through college, and be prepared to retire, in the traditional definition of no longer being paid to do any work, in our early 50′s. The discipline of savings does pay off.

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retirebyforty December 30, 2013 at 2:03 pm

I used to do the same thing when I had a regular paycheck. I like having some cash in the money market account so I can take advantage of stock opportunities.
Being content with your lifestyle is very important. It’s getting more difficult with more and more ways to spend these days.

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Gina December 30, 2013 at 5:02 am

No raises are coming in the next year. That would be great idea if you got one. I work part time for a non profit and haven’t had a raise in three years. When I do it is a matter of cents not dollars. Last raise was 8 cents. I am serious. I consider my job volunteering! My husband is in IT and there are no raises being mentioned. No stock purchase plans being implemented. We do get the match for his 401K and save 15%. We were saving max of 17500 a year, but with expenses creeping up and no raises we have to reduce this. Electric, gas, water, all have raised rates. My mortgage company is raising the payment by $60.00, taxes and insurance have gone up.

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retirebyforty December 30, 2013 at 2:06 pm

Sorry to hear that. Yeah, it’s been a tough few years for many people. You probably need to figure out how to raise your income a bit. I hear you about taxes and insurance. Good luck!

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Mike Collins December 30, 2013 at 5:08 am

My company’s 401(k) does offer an automatic increase option but I’m not sure how many people take advantage of it. Timing the increase to coincide with a salary increase is smart because you won’t really feel it. If you get a 3% raise and increase your retirement contributions 1% at the same time, your pay check will still be 2% greater than it had been.

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retirebyforty December 30, 2013 at 2:06 pm

That’s great! The automatic increase option is very helpful for the average employee.

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The Warrior December 30, 2013 at 5:34 am

Automating is the most painless way to achieve more financial goals including saving more.

We have automated everything and as soon as our consumer debt is gone, we will be automating contributions to a ROTH for the wife and one for myself.

The Warrior
NetWorthWarrior.com

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retirebyforty December 30, 2013 at 2:07 pm

I like automation too, but I manually contribute to the Roth IRA. Everything else is automated. Good luck!

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Done by Forty December 30, 2013 at 6:24 am

I remember reading about that in Nudge and agree that it’s a brilliant plan. It’s exactly the type of paternalistic libertarianism that jives with our society: set the default to the choice that helps people, but allow an opt-out. It uses our inertia to our own benefit, since the opt-out (which would hurt most people in the aggregate) isn’t likely to be used commonly.

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sendaiben December 30, 2013 at 7:03 am

Heh, I am implementing the SEP (save everything plan). The entire raise gets chucked into my monthly savings, along with the other 50% of my salary. Next month my paycheck will increase slightly, and my take home pay will decrease slightly…

I like the results so far :)

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retirebyforty December 30, 2013 at 2:08 pm

Good luck! That’s a great plan.

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Happy Life And More December 30, 2013 at 8:17 am

My company doesn’t offer automatic increase option, however I already pay the mandatory 12% deduction into the defined benefit pension plan. Ouch, it IS a big chunk of the paycheck but I signed up since day 1, so I don’t really feel the pain. Automation is the way to go!

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Moneycone December 30, 2013 at 8:21 am

Your post resonates with my most recent post! It is easy to get caught up in life and not worry about retirement – but then the consequences can be terrible. If only more employers took interest in their employees’ retirement, this world would be a much happier place!

Very nice reminder Joe! Hopefully this post will nudge people to review their retirement plans.

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Justin @ RootofGood December 30, 2013 at 8:25 am

I pretty much used this tactic during my earning years before reaching FI. I set up automatic investments each month to artificially impoverish us. That way, I would have to suffer the pain of cancelling an automatic investment if I wanted to spend money on something else.

The lazy me likes to do nothing. With automatic investments that means I save a bunch of money.

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retirebyforty December 30, 2013 at 2:10 pm

I maxed out my 401k pretty early on in my career so I didn’t have to do this much. Automation is great when you’re starting out.

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Jack @ Enwealthen December 30, 2013 at 10:47 am

When I first started my career, I had a 401k but not much support from the company as far as information, etc.

Given my low pay and massive debt at the time, I built my own automated increase. I started at 1% despite the 3% company match as it’s all I could afford with my debt payments. Every 6 months, I’d bump it 1%. It was painful at times, and the inevitable unexpected expenses threw a spanner in the works from time to time, but I persevered until I was fully maxed out.

The nice thing is when your income finally grows to the point where you max out your 401k before the end of the year and can reduce your contribution amount to spread it out over the entire year.

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retirebyforty December 30, 2013 at 2:13 pm

That was a great plan. Nice job.
I love the end of the year too. It’s great to see a bump in the take home pay in time for the holidays.

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insourcelife December 30, 2013 at 2:00 pm

I can see how these strategies can be useful to a lot of people. Perhaps the same people who have to have a budget in order to stay in the black and save. Personally I don’t use any tricks to save – it comes naturally. I also don’t use budgets because I feel that’s an inefficient way to operate, at best. “Oh, I have $70 left over in my restaurant budget – lets go out!” Stuff like that. Reading PF blogs I feel like a lot of writers and commenters are in the same boat – saving comes naturally and no budgets are needed. It’s a safe bet that any raises are automatically thought of and converted into additional savings and investments. I agree though that any strategy that makes the general public save more is worth promoting.

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Awakeinwa December 30, 2013 at 8:51 pm

For those without raise or much extra cash, this is another savings angle. Best done with a low-cost, solid yield mutual fund in mind.

http://lifehacker.com/take-the-52-week-money-challenge-and-easily-save-about-1486564993

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retirebyforty December 31, 2013 at 9:26 am

That’s a great way to start. Probably best with a saving account since you might not have much to invest.

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awakeinwa January 2, 2014 at 4:55 am

Good point. Some mutual funds allow you to start with $250. So if you have at least that much, one can bootstrap this 52-week plan accordingly.

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[email protected] December 31, 2013 at 2:45 am

I’m a huge fan of automating everything as we live on our net pay after all deductions. We prioritize our retirement accounts first, then taxable then mortgage. We do spend too much on food so I’m working to improve on that.

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Holly@ClubThrifty December 31, 2013 at 5:09 am

That’s one thing I miss about my old job- my 401K! My employers matched 4% then added a massive amount of profit sharing at the end of the year.

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retirebyforty December 31, 2013 at 9:27 am

I opened a solo 401k and was able to contribute more than ever this year. It’s all coming out of my pocket though so it’s painful. It’s nice to have an employer sometime.

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Passive Income $amurai December 31, 2013 at 2:08 pm

Hey Joe,

Love the site and been reading it for a few months now, likely to start my own soon on my journey to retire by 40 (just turned 33 this month so I’ve got a few years.) Love the information you posted, something I actually try to teach my team members at work so nice to see it actually posted. Keep up the great work!

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retirebyforty January 1, 2014 at 8:12 pm

Good luck with your site and your retirement plan. 7 years is a doable time to work with.

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