In the first few months of my career, when my husband and I were fresh out of college, a dual income family without kids, I put only enough money into my 401(k) to get my company match, which was 6% at the time. As a software engineer going from my $8-an-hour job in the campus computer labs to an entry-level, salaried engineering position, it felt like we’d won the lottery. We were rich!
I quickly became very interested in saving more. Time, with its magical compounding interest, was on our side and I wanted the option to retire early. Now was the perfect opportunity to start saving more – and we did – but we were saving to buy things we thought we needed like a second car and a house.
When I got my first raise, I did something that many savings experts suggest and I’ll be very thankful for when I turn 59 and 1/2. I formed a habit that I’ve kept up to this day.
Every time I get a raise, I raise my retirement savings at least 1%. Next time I get a raise, I’ll save 50-100%.
This way, no matter what is going on with our finances, we sneakily increase savings on a regular basis. The additional money is pulled directly out of my paycheck so I don’t notice the increase and I still enjoy the feeling of getting a raise in take-home pay. My first raise was around 3.5%. So, I increased my 401(k) savings to 7% and still made an extra 2.5% take-home. It’s easier to save when you never had the money to spend in the first place.
I’ve been doing this for almost 10 years. Sometimes I don’t get raises (like when we have historic economic collapses), but I’m up to 12% going directly into the 401(k) and we’ve also got Roth IRAs.
We’ve moved funds around and had them split almost evenly between Roth and traditional accounts (not knowing whether we’ll be in a higher or lower tax bracket in 25-30 years). This month, I decided to move more money to a pre-tax account so we could have a bit more in our paychecks to save outside of a retirement account (it made a huge difference – I’m getting $60 extra each paycheck). I’m not worried about recalibrating back to the 50/50 Roth/traditional split because every time I get a raise, I’ll increase our Roth contributions by at least 1% until we’re balanced. It’s a simple trick that takes one minute to accomplish each year and we’ll reap the benefits later.