There’s one expense even die-hard budgeters tend to leave out: Savings.
Is saving an expense? Maybe not technically. But if you treat it that way, you’re much more likely to do it. Just as you wouldn’t stiff the electric company or your cable provider, treating your savings or retirement account as a bill — an actual line item in your budget, rather than an afterthought — may help you build a bigger balance.
Saving isn’t optional
Ask any newly retired person and they’ll tell you: Saving was worth it. In fact, most people wish they’d saved more.
But in the decades before retirement, we often treat savings like the family dog who gets the occasional treat of dinner scraps: If there’s something left after all the bills are paid and the needs and wants are met, we might throw our savings account a bone. If there isn’t, it goes without.
“Most individuals, if they don’t line-item savings in, they just spend whatever money they have at the end of the month, and most aren’t disciplined enough to actually put that [remaining money] into a retirement account,” says Jeff Weber, a certified financial planner with Titus Wealth Management in San Mateo, California.
The exception, of course, is employer retirement plans like 401(k)s that pull money directly out of each paycheck. Because that money goes elsewhere before it hits your checking account, it’s virtually bubble-wrapped from the impulse to spend.
But if you don’t have an employer plan, or you’re also saving in other ways — a savings account for a short-term goal like a new car; an individual retirement account to supplement your 401(k) — why not mimic this system?
Make saving a line item
Whether you budget mentally, with a budgeting app or in a spreadsheet, you likely have a rough idea of the places your money goes. You know how much, at least generally, things like your mortgage and car payment cost.
The key here is to allocate a set amount to savings right alongside those other expenses. Transfer that amount to savings after your first paycheck of the month, and you’ll get into the habit of treating saving money in the same nonnegotiable manner you’d treat other expenses.
“It’s easy to talk about budgeting your money, but it takes discipline to follow through on those plans,” says Dara Luber, senior manager of retirement at TD Ameritrade.
One way to stay on track is to set up automatic transfers, says Weber. “I have my clients set up a separate account at a bank or brokerage — it is less likely that they’re going to spend that money.” Making it automatic means you don’t have to think about it, and you don’t give yourself a chance to change your mind on a whim.
How much to save and where to save it
When you budget, you’re basically slicing your money up to go toward different priorities. So how much should go toward savings?
A general rule of thumb is to save 15% of pre-tax income for retirement — that includes your contributions to a 401(k) and IRA, as well as any employer retirement contributions you receive.
You don’t need to include those employer dollars in your budget, since they’re not coming from your income. But Weber recommends putting money that is taken out of your paycheck, like your 401(k) contributions, into your budget. It’s helpful to see a full picture of how much you’re saving for various goals.
You can also earmark money in your budget for other savings goals. In addition to a line for retirement savings, you might have a line for college savings for your kids or next year’s vacation.
As for where that money should go: If you’re already contributing to a 401(k) with matching dollars, you can contribute additional retirement savings to an IRA (here’s a guide to IRA accounts).
For other goals, the decision comes down to when you need the money: Savings you need within the next five years will be safe in a high-yield online savings account. If you have a longer time horizon, consider investing in a taxable brokerage account.
The added benefit: freedom to spend
Budgeting has a bad reputation for being restrictive, but in fact, it can actually be the opposite. When you know where your money is going, you can ensure the destinations align with your values.
And there’s a bonus to adding your savings contributions to your budget: Once you do, you can spend what’s left as you’d like without that nagging feeling that you should be saving instead.