5 poor ways to save (and how to do better)

Too many of us don’t know how to save. That’s obvious from Americans’ abysmal savings rates. It’s also clear from the emails I get from readers who are trying, and failing, to get off the paycheck-to-paycheck treadmill.

Here are five strategies that don’t work, and what you should do instead:

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• Paying yourself last. If you wait until your bills are paid to figure out what you can afford to save, you’ve already lost the savings game. Successful savers make saving their top priority, something known as “paying yourself first.” They set aside a certain amount from each paycheck, then cover bills and other spending with what’s left.
• Saving all in one pot. Mingling your emergency fund with your future down payment, your vacation fund and next month’s insurance premiums is a recipe for confusion, if not disaster. You may not be able to figure out how much you have saved for each goal and it’s too easy to dig too deep into the pot for one objective, leaving too little to cover the others. Instead, set up multiple subaccounts at an online bank that doesn’t charge extra to do so and label each one for its intended purpose. It will be easier to track your progress and psychologically a little harder to raid Peter to pay Paul.
• Investing your savings. You may need a microscope to see the teeny-tiny interest payments you’ll get on savings in an FDIC-insured account. But trying to get more return for your money means taking more risk, which means you could lose your money right when you need it most. If you plan to spend the cash in less than five years (some would say less than 10 years), it shouldn’t be invested in stocks. Emergency funds, especially, should be in safe, liquid accounts.
• Saving at the same bank where you have a checking account. While you want your savings to be reasonably accessible, you don’t want instant access — which is what you typically get if your savings accounts are linked to your checking account at the same institution. Having your savings at a separate institution slows the transfer process, but the built-in delay can discourage you from raiding the money on a whim.
• Not making it automatic. If you have to make a decision every paycheck whether to save and how much, you’ll wear out your willpower. It’s so much easier and more effective to set up automatic transfers that leave willpower out of the equation.

What if big expenses come along and wipe out everything you’ve saved? Pat yourself on the back because your savings did its job, which was preventing you from going into debt. Pick yourself up, dust yourself off and get back to the savings strategies you now know will work.