3 Simple Ways to Bump Up Your Savings Rate

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Investors often like to focus on choosing exactly the right investment or finding the very best way to save on taxes. But Morningstar's Christine Benz believes the secret to financial success is more mundane: Find some money in your budget to save more. She is here with me to discuss three simple ways to bump up your savings rate.

Hi, Christine. Thanks for being here today.

Christine Benz: Hi, Susan. It's great to see you.

Dziubinski: You always hear that every little bit helps, right, when you're saving for retirement. And you've actually brought a real example of how saving just a little bit more can actually have a very big impact on your returns and your nest egg if you have a long enough runway. Tell us. Show us your example.

Benz: Yeah. Assume we've got a 21-year-old who has that really nice long runway until retirement. They can find $100 in their budget to save and earn a 5% rate of return, which I think is reasonable assuming that that person would have an equity-heavy portfolio and keep at it for 44 years until retirement at age 65. Well, that person would have $200,000 at age 65 simply socking away 100 bucks a month. I think that's a great example. If you can find $150 in your budget, that takes it up to $300,000. I think the key point is that you don't need to be maxing out your 401(k) necessarily. Some high-income savers absolutely should. If all you can do is start small, start small, because those small sums really can add up.

Dziubinski: You've brought three ideas today that investors can think about as ways to sort of find that $100, find that $150, find that extra money to start investing. And your first idea is to steer some of your tax refund toward savings and investing.

Benz: That's right. A stunning percentage of taxpayers do receive refunds. In fact, like three fourths of taxpayers in 2020 got some kind of a refund, and the average refund was about $2,500. Now, that is skewed by some higher-income taxpayers who receive very large refunds. But nonetheless, if you are someone who finds yourself with that windfall every year, you should think about getting that money invested. Some people might say, "Well, you've just given the IRS an interest-free loan for the past year," and that's absolutely true. But I would still say that suboptimal savings is better than no savings. So, if this is the only way that you can save through this sort of forced saving program of paying extra in your taxes, go for it and invest the money when you get the refund. And the nice thing about tax refunds is that they coincide very nicely with IRA season. So, for each tax year, we typically have until our tax-filing deadline, often April 15, to make that IRA contribution. If you get a refund, why not just steer it into an IRA for the year prior?

Dziubinski: Now, another strategy you suggest is if you're fortunate enough to get a salary increase or bump up in a given year, think about at least saving a portion of that and investing it, right?

Benz: Absolutely. And I like the idea of increasing your contribution within your 401(k), assuming you have a good-quality 401(k), even before that higher salary begins to hit your paycheck. And the idea is that you won't miss the additional funds if you start saving them right away. You won't get used to that sort of lifestyle creep that often accompanies salary increases. And another point I would make, Susan, is that, right now, we find ourselves in an environment where employees are very much in the driver's seat at many employers and certainly in many industries where employees are able to command higher salaries. So, I love the idea of: If you have been eligible for some sort of an increase, steering a portion of that into a higher 401(k) contribution. A countervailing force--and it may be fleeting--is that we have also had some higher cost of living increases come online, some higher food prices, higher gas prices, and so forth. So, you may not be able to bank as much as you would have hoped. But again, even if you can set aside a small additional sum to invest, that will help in the long term. I would think about that. Another thing that I would note is that many 401(k) plans make this super easy for you by offering a feature called "auto escalation" or "automatic escalation." It can be as simple as checking a box, and basically, you're telling your 401(k) provider that when you see higher income, you can go ahead and bump up my contribution. That's a terrific way to make your savings rate go higher as the years go by.

Dziubinski: And then lastly, Christine, you suggest that if you are a homeowner, perhaps you consider refinancing and take some of the money you would save there and save it and invest it?

Benz: That's right. We've seen mortgage rates tick up very recently, but they're still incredibly low relative to history. So, if you are someone who has a mortgage and you can refinance into a lower rate, I love trying to use those savings, those interest and borrowing savings, to help steer that toward higher retirement plan contributions or higher savings contributions elsewhere. So, think about that. I think another strategy--it won't necessarily free up funds to save--would be to swap into a shorter term on your mortgage. That's another idea. But if you are simply reducing your borrowing costs, by all means, see if you can't steer a portion of that to higher savings on an ongoing basis.

Dziubinski: Christine, thank you for your time today in helping us find some extra dollars to save and hopefully plump up our nest eggs. We appreciate it.

Benz: Thank you so much, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thank you for tuning in.