Offsetting the Pain

Matt Trogdon

IT’S ONE THING TO talk to folks about the power of saving regularly. It’s much more profound to see it in action. I was reminded just how powerful saving can be during two recent meetings with financial-planning clients. In both cases, we looked back at 2022 and calculated how much the clients had saved.

In the first case, the clients had saved diligently throughout the year. They increased their 401(k) and 403(b) contributions, they opened and funded 529 plans, and they socked all additional savings into their high-yield savings account.

During our meeting, they told me they felt like they could have done better. Once we did the math, however, we saw that they actually increased their financial assets by 25% over the course of the year.

The second set of clients have always been big savers. One of their priorities for last year was to build up more savings outside of their retirement accounts and 529 plans. I had them set up a monthly automatic transfer into a taxable investment account. We chose an appropriate fund based on their goals, and they now automatically buy shares of that fund each month. Later in the year, we also started using a money market fund for their emergency cash.

This couple has grown so accustomed to saving in their taxable account that they routinely stick extra money there whenever they have it. All in, they saved more than $50,000 into that account in 2022.

Because of their excellent saving habits, both sets of clients have been able to keep their financial plans on track despite a dreadful year for stocks and bonds. As the markets recover, they’ll be rewarded handsomely for their diligence.

Saving money is easy in theory—and much more difficult in practice. For every success story I’ve heard, I’ve witnessed other instances where someone says, “I know I should save more. I really need to get on that.” Often, that line ends up being repeated every few months without any progress being made.

Let’s face it: Setting a goal or having the intention to save money won’t cut it. It’s like exercising. You can intend to exercise, but you won’t see any results unless you actually do it. I’ve been trying to lose the same five pounds for years.

It’s important to make saving a priority if you want to do it successfully. One common mistake I see: People try to save whatever is left over at the end of each month. The trouble with this approach is that, before we reach month’s end, there are endless additional items we can spend our extra cash on.

The best way to stack the savings odds in our favor is by deciding on a monthly amount and making as much of our savings as possible automatic. Many people have the bulk of their wealth in their workplace retirement accounts or their home equity. That’s not because those are necessarily fantastic savings vehicles, but because those savings happen without having to make an active choice. The 401(k) contributions get taken out of our paycheck by our employer before we even see the money, and the home equity gets built up when we pay our mortgage.

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