Do you want to save more and spend less? When it comes to saving money, passive is the new active.
Passive saving should be effortless and invisible.
Your focus is to pay yourself first and keep the money out of your checking account.
If you are already thinking that payroll deductions are the most effective approach, then your instincts are spot-on. Your focus is to pay yourself first and keep the money out of your checking account.
When you contribute to a 401K plan, you are already passively saving. 401Ks are imperfect in some ways but for this purpose, they are great. Who reduces their 401K payroll deduction once it is set? No one ever. As Ron Popeil, America’s greatest pitchman says, “You set it and forget it.”
Some employers allow you to make other payroll deductions and if so, you should take advantage and divert money from each paycheck directly to whatever purpose you prioritize. You may have sub-accounts for various goals — vacation, wedding, Roth IRA, down payments, holiday gifts, etc. Any mental accounting trick or behavioral hack that can fool your brain into consistently saving is worth trying.
If you cannot do payroll deductions or are self-employed, the second best approach is to set up your bank account to do automatic transfers from your checking to your savings account the day after each paycheck is deposited. Every day the money sits visibly in your checking account is another opportunity to spend it, so quickly transfer it out.
If your employer does not have a 401K (or has a poor one with no match, high fees, or no Roth option), you may want to set up a payroll deduction to contribute directly into a Roth IRA, instead of your 401K. For reasons I’ve explained, a Roth IRA is usually the best way to save and this is the best way to do it.
Pay yourself first to meet your savings goals. And, the best way to do that is to go on automatic pilot.