How to save more, even when inflation is biting income

Saving money could be more of a challenge in the coming months, with inflation a problem and tens of millions of Americans lacking even a modest emergency fund.

The tax season has ended, which means that two out of three Americans have received a refund recently, which gives a nice pillow. But for many people, the hard work begins now.

Here are some tactics and strategies – some quite simple – that can make it easier to sweep away money.

Rephrase the question

Workplace plans in the 401 (k) style can be a great way to raise money, combine tax benefits and employer matching funds with the convenience of diverting cash from each paycheck. However, many people still underuse these programs, possibly because they do not understand what is involved.

Participants in 401 (k) programs must begin by deciding what percentage of each paycheck they want to save, but percentages confuse many people, according to a study by researchers at Carnegie Mellon University, Cornell University and UCLA. Instead of talking about saving in percentages, employers can encourage participation if they explained it by giving up a penny or two from every dollar earned.

Financial advisor George Fraser helped popularize this monetary method. During meetings with prospective 401 (k) participants, he often throws a few pennies on the floor to see if anyone picks them up. Few people do that. “Pennies are not meaningful to most people,” said Fraser, CEO of Fraser Group at RBG in Scottsdale. “But they can really add up.”

The academic study, conducted in collaboration with the Voya Behavioral Finance Institute for Innovation, randomly divided 401 (k) participants into two groups. The workers in the first group were asked what proportion of their salary they could invest in their pension programs. Those in the second group were asked how many cents they could save on each dollar earned.

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Workers who were instructed to set a percentage opted for an average saving of 6.9%, while those who thought in terms of pennies went for a higher 8%. The effect was more dramatic among low-wage workers, the researchers said.

Employers who automatically enroll workers in 401 (k) -like programs tend to report higher participation rates, as do those who gradually increase employee contributions over time (unless workers opt out). Explaining the savings options in terms of pennies, rather than percentages, can increase participation more.

Other ways to increase savings

While the study focused on increasing participation in and contributions to pension plans, there are other applications. The money approach in the same way can be used to build a rainy day fund or add money to health savings accounts, for example. Having a fund for rainy days can mean the difference between facing unexpected expenses or having to max out credit cards or take out high-cost loans or loans with automatic title.

In addition, people can use the pennies framework to allocate their money to multiple accounts simultaneously. For example, the academic study suggested that people might want to divert, say, six cents from every dollar earned to a retirement plan, plus two cents to an emergency fund and maybe another two cents to a health savings account.

This research, although simplified, can help illustrate basic concepts better than traditional approaches. “In this industry, we tend to overtrain,” Fraser said.

In addition, the terminology used in the financial field is often unnecessarily complicated or vague and possibly misleading, he claims.

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Play less, save more

Everyone deserves time for fun, hobbies and leisure, but many people may spend too much on unnecessary activities if it puts their finances at risk. Often the sums seem trivial, but they can go together.

In 2021, for example, Americans spent $ 60.4 billion playing video games. The average player spends about $ 76 a month, $ 912 a year and more than $ 58,300 over a lifetime, according to All Home Connections, a gaming and technology research company that surveyed more than 1,000 players about their spending habits. These figures include expenses for internet, games and equipment. The lifetime sum presupposes 64 years of gambling, from 16 to 80 years of age.

There is a significant amount of expenditure that could instead be used to collect a considerable amount of housing. The average player would generate more than $ 271,500 at retirement age if he or she invested the average monthly expense of $ 76 and could earn an average annual rate of 6% from age 16 to 65, according to All Home Connections.

The same analysis could be applied to other non-significant expenses, from travel to cinema tickets. Of course, people should be able to spend what they want, even on things that may seem insignificant to others. But the study illustrates the potential for lowering costs here and there and plowing the money into investments for long-term growth.

The analysis is similar to one made five years ago by Fran Kinniry, an investment rector at Vanguard Group. He quoted a daily cup of coffee at Starbucks to illustrate how spending decisions today can affect long-term wealth accumulation.

Kinniry assumed that you could save at least $ 1,260 a year, almost $ 3.50 a day, for every cup you brewed at home instead of buying at a restaurant. If you invested these $ 1,260 for 30 years and earned 6% annually on average, you would generate about $ 106,000.

To keep the tax effect simple, he assumed that the money was invested in a cheap, balanced fund and kept until the age of 59 1/2 on a Roth Individual Retirement Account. Credits in the Roth IRA grow up with taxes and withdrawals come out tax-free.

To decide between needs, desires

If money starts to get a little tighter in the future, more Americans will probably start paying more attention to budgeting. It is not always easy to stick to a budget, in part because it can be tedious to track all of these expenses. This is where relatively simple methods that the 50/30/20 rule can help.

This budgeting concept is based on the idea of ​​dividing your expenses between needs, wishes and savings / debt reduction on a 50/30/20 basis. Needs or necessities to live like food bills, electricity fees and rent or mortgage payments should be a priority in your budget and account for 50%. Requests come next at 30%, followed by savings and / or debt reduction of 20%.

Some items are not easy to categorize. Most people would consider leisure travel a luxury and thus a need, but what about a gym membership? It can be counted as either a need or a desire, depending on how you look at your health and fitness.

The 50/30/20 method thus requires a bit of thinking, planning and analysis, just like other types of budgeting. But it can represent a decent option for people seeking simple guidance along with a framework of discipline.

Reach the reporter at russ.wiles@arizonarepublic.com.

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