Jean Chatzky, CEO of HerMoney Media, recently shared tips on saving for specific goals. According to Chatzky, the key to successful saving is automation. “If you think about why a 401k plan works, it’s because it’s automatic.
The money comes out of your paycheck, you don’t see it, you don’t touch it, you don’t spend it,” says Chatzky. She advises applying this principle to other savings goals, such as building an emergency fund or contributing to a college savings plan. For those without access to a work-based retirement plan, Chatzky emphasizes the importance of automating contributions into an IRA, Roth IRA, or SEP.
When it comes to the amount to save, Chatzky recommends aiming for 15% of your income annually, especially over the long term. However, she acknowledges that starting at this rate can be daunting for some.
Automate your savings goals
Instead, she suggests gradually increasing your savings rate by about two percentage points with each raise or annually until you reach the 15% target. Chatzky also highlights the importance of looking at both sides of the financial equation: income and expenses. “We often try to nickel and dime our way there by trimming our expenses to the bone, but sometimes it’s essential to look at increasing income,” she says.
This could involve negotiating a raise, taking on a side gig, or working extra hours. Another behavioral finance technique Chatzky recommends is making your goals visible. If you know you are saving for a home renovation, and you want a particular kitchen design, print out a picture and put it where you can see it.
Name your account for that specific goal, like ‘kitchen renovation fund’. This constant reminder can help you resist impulse purchases,” she explains. By implementing these strategies, individuals can make significant progress towards their financial goals, ensuring that they not only feel prepared but also have a solid plan in place.