The Smart Savers Guide on How to Save Money From Salary

Figuring out how to save money from salary shouldn’t be so hard! Here are 5 easy things you can do to save more!

Author: Kari Lorz, Certified Financial Education Instructor

Author: Kari Lorz – Certified Financial Education Instructor

Saving money from your budget gets a bad rap. People see it as deprivation, boring, lame. But in actuality, saving money means freedom.

Seriously, that’s exactly what it means! When you save money, you are usually saving it for something important or special. Things like a downpayment on a home, a dream vacation, and an emergency fund to ensure security for your family.

All of these things equal the freedom to do what you want.

See, saving money is actually awesome! Here’s how to save money from salary so you don’t feel deprived and so that you can make the most of your income!

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When you get a salary, it makes saving money easier, as you know what your monthly income will be. So even if you make a 6 figure salary or even $50,000 a year income, you can still plan for saving!

You mostly have to manage the outgoing money (fixed expenses, variable expenses, and any unexpected expense) in your budget to save more. But many people overlook their gross pay and focus just on the net; this is a mistake.

There’s a lot that you can do to influence your net pay from your gross income to meet your monthly savings goal.

Because getting a bigger paycheck now, means you can invest more of your income to earn more in interest! And then that interest will earn interest, oh the sweet joy of compound interest. Pretty soon, you’ll not only meet your savings goal but knock it out of the park!

One – adjust your tax withholdings

The first way to save money from your salary is to adjust your tax withholdings down to as close as it needs to be without going under or over by a lot.

Now, I know we all like that feeling when you get a big tax return; it feels pretty good to have a $1,500 check handed to you! BUT, in all actuality, you loaned that money (which was yours, to begin with) to the federal government on an interest-free loan. When you could have used that money to pay down debt or earn money in the stock market.

How you fill out your W-4 when you are hired makes a big difference to your take home pay, so it might be time to revisit HR and adjust your withholdings. You want to pay the least amount as possible from your paycheck without underpaying and owing taxes.

According to Kiplinger , “It all comes down to how many “allowances” you claim. The more allowances you claim on your W-4, the less income tax will be withheld. If you claim zero allowances, you will have the most tax taken out.”

You can go to the IRS site and do an online estimator to figure out how much you need to withhold from your income. (You’ll need your last year’s return to fill it out).

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Two – sign up for your workplace retirement program

For many workers, they have the opportunity to contribute to an employer-sponsored retirement saving program, which usually has an employer match. You should absolutely be taking advantage of this if it’s available! The minimum amount you should contribute is the employer match amount. This can be anywhere from 3-10% match.

Usually, people want to save for retirement, so if this is one of your goals, then great! You need to pick your plan, almost all companies use a Traditional 401k retirement account, and some have a Roth option as well.

One of the big investment players, Charles Schwab , breaks it down fairly easily, “The basic difference between a traditional and a Roth 401(k) is when you pay the taxes. With a traditional 401(k), you make contributions with pretax dollars, so you get a tax break up front, helping to lower your current income tax bill… With a Roth 401(k), it’s basically the reverse.”

This is an important choice, but for the sake of this post, say yes to one of the options!

Open your own retirement accounts

Don’t forget that you can also open your own retirement account, completely separate from your workplace. These are still tax-advantaged accounts called IRA’s. There is a Traditional IRA option and a Roth IRA option.

They run similarly to the 401k accounts in how & when you pay taxes. The main difference is that for IRA’s you have more options & plans to invest in and you have a much lower contribution limit.

  • 401(k), 403(b)’s and 457 accounts = $19,500 contribution limit for 2021
  • IRA contribution limit = $6,000 for 2021

The good news is that you can contribute the max amounts to both types of accounts; IRA & 401(k). But you cannot contribute $6K to a Roth IRA and then $6K to a Traditional IRA, but you can contribute some to each, as long as you don’t go over the $6K limit collectively.

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Three – use lesser-known pretax accounts

Take advantage of employer-sponsored programs to save on regular & routine expenditures. Things like a Health Savings Account (HSA) or a Dependent Savings Account – for daycare costs. Sometimes these are referred to as Flexible Spending Accounts; see your HR Dept for all the specifics on your workplace.

These accounts let you use pretax dollars from your income to pay for things. My family personally uses both a Dependent Savings Account and an HSA. Kiplinger estimates that “The IRS sets a $5,000 household limit on contributions to dependent-care accounts. Knocking five grand off your taxable income saves you $1,633 a year in the 25% tax bracket because the money also avoids social security and medicare taxes.”

Not too shabby!

Four – save money immediately 

With your new hire paperwork, you usually say where you want your money to go. Usually, you can select a few different checking accounts. How about sending 85% to your regular bank account and then sending 15% to a savings account.

The percentage amounts are up to you, and so is what you use the accounts for. The most important point is that you set it up to separate your money automatically with your direct deposit! That’s the key to successful savings!

When we have to make choices and take action on those choices, we defer to inaction. Or we forget, or we wait, maybe we’ll need that money, Christmas is coming up after all!

NO! Don’t allow yourself not to save. Set it up to separate automatically! And it’s done right at payday, so you know you will ALWAYS. SAVE. MONEY. EVERY. SINGLE. MONTH! (Could you feel that aggressive hand clap in there?!?) This is called Paying Yourself First and is the 2nd piece to the Savings for Smarties (I just made that name up, but you catch my drift).

Where to save your savings

Don’t forget to look into opening a high yield savings account for things like your emergency fund. These accounts earn a much higher interest rate compared to regular savings accounts. Ally bank is a great option!

For example, at Wells Fargo currently, you earn .01%. While at Ally Bank you earn .50% savings rate. That means on a $10,000 balance you could earn $55 dollars in interest vs earning $1 in interest in a year.

Now, I know that doesn’t sound too impressive, but then that interest starts earning interest, and it keeps rolling, getting bigger and bigger. Before you know it you’ll have a net worth of $54 billion!

Just kidding.

No, but seriously compound interest is your friend, like your BFF! It’s the quintessential passive income earner!

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Five – separate your savings

Once you figure out how to save money from salary, you need to keep it “saved”. There’s no point to working this hard (or this smart) if you’re just going to leave the income in your general budget!

Keeping your savings separated from your regular spending money in your monthly budget, this is a must do! Let’s say you save $250 for a car repair needed in a few months. Then in a few weeks, you log into your bank account, and you have $457 left; Woot Woot! No bills are coming out, and payday is soon, so you head to Home Depot and get a new patio set, spring is here, and you can’t wait to eat dinner outside with the fairy light strings you also bought!

Yup, you spent your car repair money on fairy lights. DANG IT!

But if you had moved that money from your budget into a special savings account labeled “car repair,” you wouldn’t have touched that money. Have as many separate accounts as need be to keep your money organized. Or you can use cash envelopes for a short-term savings goal. These are called sinking funds, where you prepay for upcoming expenses. I house all of the money for my financial goals in SF type of accounts.

We save money every month, save it for everything we need, and most of what we want! You can read about how sinking funds work and why they are one of my favorite things ever!

If you can’t designate your paycheck to go into multiple amounts with your workplace paperwork, then set up your bank to auto-draft a specific amount 3 days after payday to your savings. Use the three days, as it gives time for the money to clear your checking account even with weekends and holidays.  

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What to do with the money you’ve saved

Congratulations! You’ve saved a boat load of cash! Now, what are you going to do with it? Well, some of it was saved into your retirement account, so that’s off-limits. But the rest of it is fair game.

I think you should spend 5% of what you’ve saved on whatever splurge you want. (We do this with any type of cash windfall, like a tax return or a monetary gift.) You still get to have some fun while being responsible.

Other smart moves that you can do with your savings…

  • Take care of any high-interest debt repayment (i.e. credit card debt)
  • Pay off lower interest rate debt (i.e, student loans, car loans, etc)
  • Fill your emergency savings (6-9 months of living expenses)
  • Start a 529 college savings plan for your children
  • Set aside the money in your sinking funds (i.e. vacation, home repair, other larger living expenses, etc)
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At the end of the day

Figuring out how to save money from salary shouldn’t make you cringe or be so complicated that you are paralyzed and do nothing. Yes, setting up smart personal finance goals and processes takes a little bit of initial legwork, but they should run smoothly once you set things up.

Just know that with each of these options, you’re not locked into anything. You can cancel it, change it, and tweak it as needed. Just as with your monthly budget, tweaking & adjusting usually is needed, as delicate changes can have a big impact! Just keep trying!

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What changes will you make to help save more from your salary?

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  1. It actually really annoys me that my employer doesn’t allow us to divide our paychecks into multiple accounts-that’s such a good and easy way to save! Thanks for your tips.

    1. Oh I’m sorry, some employers do and some don’t. Just set up an auto-transfer for 3 days after your payday, that will give it enough time to clear for the weekends.

  2. I can’t agree more on #4, saving money is so important. I learned this lesson very early in life. My father was very strict and it wasn’t always easy to get money from him. So I had to find ways to earn and save as much as I could. I can say that I built my financial independence by saving. Very insightful post, thanks for sharing! ?

  3. I found your point about adjusting tax withholdings really interesting! I never thought about it as giving the government an interest free loan…. something for me to think about for sure! Thank you for sharing šŸ™‚

    1. Oh yeah, adjusting your withholdings so you can get as close to zero as possible is a smart move, but it doesn’t “feel” smart as you’re not getting that big rush when you get a return. funny that way huh.