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Sometimes small steps go a long way.

Key Point

  • With a solid cash reserve, you can weather the crisis debt-free.
  • Suze Orman recommends increasing the savings rate by 1% each year.
  • A similarly easy way to increase your savings is to bank your annual after-tax pay raises.

It’s always important to have enough cash in your savings account. That’s because you never know when life throws a curveball, and it’s important to be prepared for unplanned bills and periods of unemployment (especially these days, with recession warnings).

But increasing your savings is easier said than done. This is especially true these days, given how inflation is wreaking havoc on so many people’s budgets.

If you need to save more, you can make yourself miserable by spending less and saving more. But financial guru Suze Oman says there might be a better way.

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A slow and steady approach is a solid approach

Just to be clear, if your savings account is currently empty or you barely have enough money to cover, say, a $500 expense, you may need to use extreme measures to build up your cash reserves. I can’t. That could mean cutting back on all non-essential spending for a period of time, taking on another job to increase your income, or doing both at the same time.

But let’s say things aren’t so dire. Let’s say you have a decent level of cash reserves, but you’ll feel better with more. Or let’s say your emergency fund is in good shape, but you need to improve on building your long-term savings. In that case, increasing the savings rate by 1% each year can make a big difference, Orman says.

For example, say you currently earn $60,000 a year and you are saving 2% of your income, or $1,200 a year. The goal is to save 3% of your income next year, 4% the next year, and so on.

If you go that route, you’ll be able to adapt to a gradual reduction in spending (assuming no pay raises, you might not lose any of your available cash if your salary is up enough) But it can also make a big difference in your savings over time.

Another option to consider

What makes Orman’s advice easy to implement is that you don’t have to resort to drastic measures to increase your savings. But an equally easy approach is to save on annual after-tax pay raises.

For example, a salary of $60,000 increases to $62,000 next year. Extra doesn’t mean he keeps $2,000. Part of that is because he owes the IRS. But let’s say you’re left with an extra $1,600 a year after taxes. If you pledge to save everything instead of spending that money, you can do great things for your finances without much trouble. That extra cash is money you’re not used to living with, so it’s not that hard to let go of.

In fact, the point here is that the easier you make the process of saving money, the easier it should be. So, whether you want to save a raise or increase your savings rate by 1% a year, the key is to find a way that works for you, both logically and mentally.

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