How I save $40,000 per year

September 14, 2009


One word.  Automation.  Ramit Sethi, of I Will Teach You To Be Rich wrote an excellent post on how to automate your finances. Here is the link if you want to read more:

So how have I applied this to my life?

First of all, you have to understand the hierarchy of where you should put your money.  It goes in this order:

1.   Funding your 401k up to your employer match

2.  Max your Roth IRA

3.  Max your 401k

4.  Taxable Accounts

In the military we have the Thrift Savings Plan, our version of the 401k.  The maximum contribution limit for this current year is $16,500.  Divide that by 12 months, which allows you to contribute $1375 per month.  That comes automatically out of my paycheck before it even hits my bank account.  What you don’t see, you don’t miss.  At the end of the year, it is already maxed out without any work on my part.  Done.

Next account to knock out is the Roth IRA.  The max contribution for that this year is $5000.  I like to max out this account on January 1st of every year so I don’t have to think about it anymore.  It is so much easier that way.  So how do you do it?  $5000/12 months = $417 per month.  Automatically have that amount transferred from your checking account to your high interest savings account (e.g. ING or HSBC).  If you get paid twice a month, set it transfer $209 a couple days after each payday to this account.  This way, you are at least accruing some interest on your money.  Once Jan. 1 hits, you now have the ability to max out Roth immediately and begin saving for the following year’s contributions.

Now that you have your retirement accounts taken care of, you can invest even further in your taxable account.  The downside to the taxable account is that it is not tax sheltered like the 401k and Roth.  The upside is that the money is available to you at any time, unlike retirement accounts, which have an early withdrawal penalty.  How much you put in depends on your comfort level.  An easy way is this:

1.  Start with your monthly take home pay (your 401k should already be funded at this point)

2.  Subtract your automatically billed monthly expenses (phone, rent, gym membership, etc.)

3.  Subtract the $417 that is going into your high interest savings account to fund your Roth for the following year.

4.  Subtract monthly expenditures on gas, groceries, entertainment, etc.

5.  If you have money left, that can be set to automatically be sent from your checking account to your brokerage house a few days after payday, just like all your other funds.  The key is to make it automatic so that INVESTING WILL BE THE NORM, NOT THE EXCEPTION.

If you don’t have the money to fund all these accounts adequately, going through these steps thoroughly provides the additional benefit of helping you prioritize.  Maybe you don’t need that full cable package or that magazine subscription.  Maybe you can limit the amount of times you eat out.  Taking a moment to play around with these numbers can give you a greater sense of control over where your money is going.

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