It seems like there are hacks for everything these days. There are life hacks, cooking hacks, weight loss hacks, etc… But what really is a hack? It’s defined as a technique or a strategy to make your life easier or more efficient.
So I was thinking the other day about financial hacks. What am I doing that makes achieving my financial goals easier and more efficient? And of all the hacks, which is the easiest financial hack?
That’s an excellent question. But first, do you even need a financial hack? Let’s talk about savings.
U.S. Savings Rates
Americans are notoriously bad savers. In fact, in early 2016, our savings rate, while still recovering, was at a meager 5.4% as you can see in the St. Louis Federal Reserve data graphed below.
So, what does a 5.4% savings rate mean for you? Well, if you saved at a rate of 5.4%, then you would be able to reach financial independence in a little less than 64 years.
If you started working after college at the age of 22, then you could retire at the ripe old age of 86! Hmmm, that’s not my plan. For example, if you want to get out at 55, then you should be targeting at least a 25% savings rate!
(If you’re curious about other savings rates and their implications, check out Are You Saving Enough?)
If you look at the past eight years of savings data, you’ll see that as a country, our savings rate is usually well below 7%. As my old football coach used to say, “That’s piss poor.”
So clearly, people need financial hacks to help them get their savings rates up!
The Easiest Financial Hack
So, what’s the easiest financial hack? Well, I can tell you what mine is and you can decide.
First, I make sure that my paycheck covers all of our normal expenses. Then, having a corporate job, I also make sure that I’m maxing out my 401k and HSA out of each paycheck as well. So far, so good.
Then I made a simple rule. I would only spend 33% of any “extra” money I received in addition to my paycheck and would save the other two-thirds. That’s it, that’s the hack. It’s just that one simple rule. So, how does it work in practice?
So, for me, I’m lucky enough to get a large annual bonus paid at the beginning of March each year. I take 33% of it and pay down the mortgage. I take another 33% and put it in the kids’ college funds. The other 33%? That goes into our checking account to fund extra vacation money, going out to eat, whatever.
Why is this the easiest financial hack? Here’s why:
- I only need the willpower to make the decision once a year
- The amount of money is large enough that it will make a real impact
- If the bonus is smaller than expected, it won’t affect paying my normal annual expenses
- I still leave myself a reasonable portion (33%) to enjoy and have fun with, so the whole family feels good about it
Now, you may be saying, “Hey Jon, that’s great for you, but I don’t get a bonus. What can I do to take advantage of the easiest financial hack ever?” Easy enough, just create your own bonus.
How to Create Your Own Bonus
If you don’t get a bonus, or if you want to augment your existing bonus, the process is simple. Just adjust your tax withholding so that you get a bigger refund when you file your taxes. I know this is going to be controversial.
Thousands of words have been written by indignant personal finance bloggers spewing with disgust over giving the government an interest-free loan which they then return to you at tax time. I get it.
My only rebuttal is this. People are not robots and for some folks, they are better off having more taxes withheld from their paychecks and giving themselves a DIY bonus at tax time, rather than relying on themselves to have the willpower to take a chunk of money out of each paycheck to set aside.
Rule #1 of personal finance is to pay yourself first, right? So, if you can increase your withholding and live off the balance, you could find yourself with a nice juicy bonus when you file your taxes. Consider yourself paid.
Then, your biggest problem will be figuring out what to do with it. For me, I have already maxed-out every opportunity to save money in tax-deferred accounts (The Brutal Effect of Taxes on Your Savings), so the mortgage loan and college savings are my next two biggest priorities.
For you, it may be something else. The good news is that you will have choices and the amount of money will be large enough that you could do something significant with it.
Any Extra Money is a Bonus
You should consider any non-paycheck money as a bonus. For me, it’s my actual bonus from my job, plus my tax refund, plus the profits from my wife’s side business – all bonuses. And if you ever receive an inheritance, what should you do with it? More bonus!
What’s great about this bonus money is that I’ve already decided what to do with 2/3 of it ahead of time, so each year I use the money to take a big whack at the mortgage and then another chunk goes towards college savings. And, since this is “extra” money, allocating just 1/3 of it for spending on fun things still seems like plenty.
The Easiest Financial Hack
So, what do you think about the easiest financial hack ever? Only spend 1/3 of any bonus money you receive each year and figure out what you’ll do with the other 2/3 ahead of time. Don’t have a bonus? Create your own!
This one financial hack could be the biggest financial move you make this year!
Do you get an annual bonus? Will you create your own? What will you do with your bonus money this year? Do you have a rule on how much you will save or spend?