Updated on 09.10.14

Trimming the Average Budget: Savings

Trent Hamm

Cash Contributions (optional retirement and cash savings) – $1,821/year

The average American family contributes $150 a month to their retirement plans and/or to their personal savings – and that’s a commendable thing. In fact, this is one part of a budget that should grow bigger while other parts grow smaller.

So, rather than focusing on “trimming” this section of the budget, I’ll instead mention strong techniques for maximizing the “bang for the buck” one can get from their personal savings and retirement dollars.

Maximizing on Your Savings and Retirement Fund

Start (and maintain) a cash emergency fund

Having some cash in a savings account at your bank can make an enormous difference when an actual crisis comes about. If your car breaks down and you have $1,000 saved up in cash, it’s not a worry – but if you don’t, you’re going to be paying some serious finance charges. Saving a bit now for emergencies actually saves you a ton of money later on.

Find a bank that doesn’t bleed your savings with fees

ATM fees, maintenance fees, access fees – banks love these fees. It’s one way banks make money. Of course, some banks put fewer fees on the backs of their customers – and if your bank is loading you down, you can find financial benefits from finding a better bank.

Open a Roth IRA

For most people (those earning under $100,000 a year, roughly), the Roth IRA is a great way to start saving for retirement, even if you don’t have much to save. It’s easy to set one up through Vanguard or Fidelity or your investment house of choice. They’ll just take a bit of money from your checking or savings account each month and invest it for you for your retirement. Then, when you’re 59 1/2, it’s all yours – tax free.

If you’re unsure of your retirement investments, choose a “target retirement” fund

If you’re trying to piece through complex and confusing investment choices in your retirement plan and can’t make heads or tails of it, a “target retirement” plan is usually the best choice for you. It automatically maximizes your risk when you’re young – keeping you heavy in stocks – and then scales back to more safe investments when you get closer to retirement. It does the leg work so you don’t have to.

Automate as much of your savings as possible

Automatic savings plans make it incredibly easy to start saving. Simply instruct your bank to take a small amount from your checking account and put it into your savings account (even if they’re at different banks) each week. You won’t miss $10, but at the end of the year, it’s turned into $520.

Set up savings plans today for your big goals tomorrow

Dreaming of taking your whole family to Disneyworld in a few summers? Start saving now. Set up a savings account at an online bank and instruct the bank to take $40 from your checking account a week. In two and a half years, you’ll have $5,000 for that trip. You won’t have to go into debt to do the things you want to do – and starting now means you only have to spend lunch money each week to get there.

Find a bank that offers a strong interest rate on savings – and keep much of your savings there

You don’t have to keep your savings at the same bank as your checking account. You need good customer service and low fees for your checking account. For savings, the interest rate matters a lot more. Shop around and find an account that offers a great interest rate, then open a savings account there. Not only will your money earn more, but you’ll find it’s much easier to save if it’s not easily accessible at the ATM with the card in your pocket.

Lock up some of your savings in CDs

If you have quite a bit of savings – more than a couple months’ worth of living expenses – consider putting the extras into CDs. CDs – certificates of deposit – are basically like special savings accounts with your bank. In exchange for agreeing to not touch the money for a certain period of time (say, a year), the bank gives you a much better rate of return on your money. If you don’t need that cash right away, put some of that extra cash into CDs and earn a little more with it.

I want your help! In the comments, please let me know which of the tips you find most useful for trimming these costs. I’ll include the top choices in a comprehensive budget trimming guide at the conclusion of the series.

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  1. Benjamin says:

    The importing thing is starting early and making these savings automatic!

    This is one area of my financial life were I feel I have been pretty good at.

    I immediately enrolled in my company’s 401k program when I got a “real” job out of college. And my budget has evolved over the years where I no longer “miss” the reduction in net pay.

    Plus, its nice seeing a steadily growing balance in my retirement account(with the exception of 2009 :()!

  2. Rachel says:

    Having a savings accout is so important, but you need much more than a $1,000 emergency fund. I hope people don’t stop there. We put our car in the shop this week for some repairs, and it came to $2500.00! We are in good shape, enough to cover 6 months if my husband has a job loss, and an additional $5,000 to cover unexpected costs and pay quarterly and annual bills.

    We have had very few vacations, don’t eat out much, and at one point I was working seven days a week to pay off some debt. Save, save and save some more!

  3. lurker carl says:

    “Cash contributions” is never defined in the expenditures breakdown. Who would come up with a term like that for discretionary savings? The Department of Labor is hard at work inventing newspeak.

  4. Kevin says:

    The Bureau of Labor Statistics, part of the Dept. of Labor, defines Cash Contributions as charitable gifts. A direct quote: “cash given to persons outside of the household, charities, churches, and other organizations.” I’d post a link, but my comment would go into moderation limbo…

  5. Courtney says:

    The average is $150/month to savings and retirement total?? We are saving nearly $1800 a month just into 401Ks and Roth IRAs (not counting matching). No wonder there are so many negative articles about saving habits – I just read one yesterday entitled “Why you’ll probably die broke and unhappy.”

    I would say the best tip is not only to automate month to month, but to automate increases – our 401K providers let us select an option to increase contributions by 1% (or more) automatically every X number of months. You can set this to coincide with your annual raise/cost of living increases and never notice the difference in your monthly budget.

  6. almost there says:

    Having enough savings to pay off the mortgage reduces shelter costs a whole lot.

  7. Tracy says:

    I found that daily budget tracking through Mint has made a huge difference for me. I had so much fun with it I posted it on my blog. I found ways to shave $505 out of my budget the first month and I think I can find more waste as I go along. At least I hope so.

  8. LC says:

    Nice to see all of these savings tips, especially from the banks which bleed many people dry every month. It is importatnt to keep track of these fees.

    I have a spot on the family budget spreadsheet for finding savings every month. It seems that I never run out of ways to cut spending.

  9. lurker carl says:

    So, that $1821 for “cash contributions” is charitable giving rather than savings or retirement. The retirement/pension/Social Security is a different category, that spending is a bit over $5K per year. I don’t see any category on that chart for discretionary savings, that number may be too insignificant (or negative) to measure.

  10. Courtney says:

    @ Kevin and lurker Carl – that number makes a lot more sense in the context of giving rather than saving. Thanks for pointing out the discrepancy in the definition.

  11. KC says:

    My advice for increasing savings is to implement all the other ideas on saving money on shelter, gas, entertainment, food and all the other things we’ve been talking about the past few days. Use the money saved from those ideas and apply it to your savings :)

  12. Shevy says:

    @lurker carl
    The full definition of “cash contributions” according to the Bureau of Labor Standards is the following:
    “Cash contributions includes cash contributed to persons or organizations outside the consumer unit, including alimony and child support payments; care of students away from home; and contributions to religious, educational, charitable, or political organizations.”

    Therefore this category doesn’t have anything to do with savings. Savings for retirement were in the “retirements, pensions & Social Security” section. There does not appear to be any other category that addresses savings such as an emergency fund or savings for a future purchase.

    Sad fact, but until recently the average savings rate was negative according to the articles I’ve read. And the only other place where any savings figure *might* be hiding is in the difference between the income before taxes and the average annual expenditures (along with taxes, of course).

    As for savings, it should definitely be a measurable category and the suggestions, both in the post and the comments, are good. More people just need to do them!

    My suggestions are to save even if you think you can’t. Have as little as $5 or $10 taken out every week. Once you get used to it start increasing the weekly transfer gradually. Put your raises away (assuming you get one) because you won’t miss them. If you get a bonus, take a little bit for a tiny splurge (like going out for coffee or lunch or buying a music CD) and then bank the rest (or pay down debt with it).

  13. Jules says:

    If you don’t mind not earning any interest on it (at least for a little while)–start up a change jar, or a small-bills jar. We have one of each–the spare change jar is for our wedding, while the small-bills jar is for Christmas (my boyfriend’s family tends to be extravagant about Christmas). It’s a completely painless way to save, really. And it comes in handy if you need an extra $5 to pay off the pizza guy :-) (Just be sure to replace it!)

  14. Evangeline says:

    When it comes to savings, please don’t be intimidated by the numbers. Just start. Even the tiniest amounts will add up over time. And it’s true, $1,000 won’t cover a $2500 repair, but it will reduce what you put on a credit card to $1500, It also can cover insurance deductibles and all sorts of other emergencies. The two keys are 1) saving something-anything- consistently and 2) learning what is really an emergency.

  15. AnnJo says:

    At the risk of sounding paranoid, I urge everone to consider keeping SOME savings in cash – real cash as in $20 dollar bills in your home safe or wherever – rather than in the bank. Bank closures, extended power outages, evacuations due to natural or “man-made” disasters are very low probability events, but they do happen.

    I had a small account in a bank headquartered in New Orleans. During Hurricane Katrina, the funds and online access were completely unavailable for several days. This didn’t affect me because it was not my main bank and I live across the ocuntry, but if I’d lived there and been trying to buy gas on that bank’s debit or credit card so I could get to a friend’s house instead of leaving my car by the side of the road and being shipped to a shelter in Houston, having a few hundred in cash could have made all the difference.

    Granted, if you keep $1,000 in cash at home, you’ll lose maybe $10-15 a year in interest. Think of it as a very cheap insurance policy against rare but serious, possibly deadly, events. Obviously, if you do this, you’ll want to keep it well hidden and not tell undependable family members about it.

  16. Annie G says:

    For anyone wanting to start a Roth who does not have a big chunk of money to get started (Vanguard, for example, requires $3k to open), try TRowePrice where you can contribute as little as $50 a month.

    That’s what our son did after he turned 18. At almost 21 now, he has over $2500 saved for retirement. Not a bad start for someone still in college!

  17. Amy says:

    Most useful — automate your savings. Definitely! Part of my paycheck automatically goes into my 401K & savings accounts, with the remainder being placed in my checking account. Roth IRA contributions are automatically deducted from the checking account every month. I don’t have to remember to move money around & I’ve gotten used to living on what’s in the checking account.

  18. topspin says:

    Note that starting this year even those making more than $100,000/year are now eligible for Roth IRA contributions via the roundabout way of contributing to a regular IRA and then rolling it over right away. The NY Times has a good Q&A on the topic.

  19. JK says:

    We both have 15% of our pay automatically deducted by payroll and put in our retirement plan (RRSP here in Canada). Our companies match a portion and I’m all for getting free money, but we contribute well beyond the match. If the deduction is done at source our income tax deductions are adjusted accordingly. I means I won’t get the giant refund in the spring, but my contribution is less painful because it’s not taxed on a weekly basis. I still make the contribution, but more of my money stays in my regular cash flow.

    Any extra cash leftover every Friday also goes to either retirement accounts or extra mortgage payments. Because we make additional contributions throughout the year we always have some sort of tax refund. That immediately becomes either the first contribution of the next year, or a big extra mortgage payment.

    Assuming we aren’t taking a major trip or replacing a vehicle that year, we normally tuck 40% away for retirement and extra mortgage payments (which I regard as the same as savings).

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