The Best Way to Save Money

If you’re not good at saving, it’s not your fault. In fact, the Federal Reserve says 40% of Americans don’t even have $400 to cover an emergency expense. The good news is that there’s a simple way to win this fight: Make it automatic.

The easy way to do it is through payroll deduction, because the money you never see is the money that you’re much less likely to miss.

The U.K. government over the past decade has been phasing in a law that requires employers to enroll the entire working population into a retirement savings program. Every one of the 1.2 million employers in the U.K. must participate. The program started with employees saving 2% of their salary. Over the past year, the program bumped the share to 5%, with the employer kicking in a portion. Employees can opt out if they want.

It might seem counterintuitive that many people, even those with lower incomes, are able to keep saving. Many people live paycheck to paycheck, without much financial room. People on lower incomes have a higher likelihood of sticking with the savings program, because they like watching these savings build up.

Studies in the U.S. have found, just as in the U.K., most people stick with saving money in a retirement plan once they are enrolled. However, far fewer signed up for the very same retirement savings plan if they had to do it themselves. Some employers in the U.S. now enroll workers automatically, the same way the U.K. requires. That method is especially powerful because it employs two levels of automatic saving: auto-enrollment in the plan and auto-deduction from paychecks.

If your employer offers to match funds you put into a 401(k), that’s free money that you don’t want to pass up. Also, the wages that you squirrel away in retirement accounts like 401(k) plans and IRAs reduce the amount of taxes you’ll have to pay at the end of the year too.

Personal finance experts also say it’s a good idea to send money into multiple accounts — one for retirement that you never touch; another for expenses that pop up, like car repairs or a broken washing machine; a college savings fund if you have children; and one to save for vacations or other fun nonessentials. Experts advise that when you save for emergencies, find an account that doesn’t charge fees.