Have a Hard Time Saving? You Can Amass a Fortune by "Tricking" Yourself

Here's an article from Kiplinger's about a young man who has a hard time saving for retirement, so he "tricks" himself into saving. Here's what he does:

So far Goldberg's best strategy has been to trick himself into saving. He contributes 6% of his income to his 401(k) -- money that comes off the top of his paycheck before he can spend it. Because his contribution is made in pretax dollars, it lowers his taxable income. In fact, Goldberg could probably bump up his contributions without noticing too much difference in his take-home pay. As a bonus, Goldberg's employer matches 25% of his contribution -- and that's free money.

In addition, Goldberg automatically transfers $200 a month from his checking account to his Roth IRA. With a contribution limit of $4,000 on Roth accounts for 2006, he could invest as much as $333 per month. Unlike a regular IRA, Roth contributions aren't tax-deductible. But Roth money won't be taxable when Rob retires and withdraws it.

Two simple principles that can help everyone amass a fortune:

1. Contribute as much as you can to your 401k -- at least enough to get the entire employer match.

2. Set up a system where you automatically save a certain amount each month by transferring it from your checking account to investment/savings accounts -- just like the system detailed in The Automatic Millionaire.

I max out my 401k (which, by default, gets me the full company match). I also have an amount automatically moved from my checking account to my investment account every month -- and it adds up pretty quickly.

These are two great ways to save money and I recommend them completely -- especially if you're currently having a problem socking away some extra bucks.

FMF recommends Emigrant Direct.

Comments

[Jane Dough]

Automatic savings and contributions are a procrastinator’s best friend :)

[Flexo]

I yearn for the day I have the income (or so few expenses, or both) to fully fund my 401(k).

[javasoy]

there are things to consider about how much you should contribute to your 401K. If you are absolutely sure that you are going to have diminishing income when you get older, by all mean yes, maximize it. But if you are one of the lucky American that have an ever increasing income stream, then maximize your 401K could be a bad thing. It pays, however, always maximize your ROTH IRA.

[FMF]

Assuming you're not locked out of the Roth by income limits. ;-)

[Dus10]

If you are locked out of a Roth IRA because of income limits, then you are either not maximizing your tax strategy, or you are extremely well off. $150K a year, for a married couple, is considerable. If you have a good tax strategy, you could have much more actual income, but still fall under stand threshold.

[FMF]

Yep.

[Imtos]

Dus 10, what do you mean by good tax strategy? How can you have "much more actual income" and fall below the threshold?

[javasoy]

you mean most people don't make over 150K a year?

....

just kidding. There are many ways to reduce your earned income. That's the key. Shift more income to non-earned income category you should do fine.