The title of this post hopefully gives away the subject matter. But rest assured, this is not a post on “tricks” or “hacks” or anything like that. Every time you see one of those in any number of publications, the results are, almost invariably, disappointing nonsense. Really, you can pay off your mortgage earlier if you pay more money each month??? What a trick! Eye roll. (And, let’s remind ourselves that paying off your mortgage as quickly as possible may not net you the highest retirement balance: Debt).
Instead of stating the obvious, I’d like to expand upon some of the techniques I’ve used to accrue money in my brokerage account as part of my early retirement / FIRE strategy. Notice that instead of calling them “tricks,” I call them “techniques,” so you know it’s got to be good.
If you’ve already considered these, then great! If not, then maybe you’ll find this helpful. So, fair warning, a few of these might be repeats of what I’ve mentioned in other posts. But let’s face it, they may be important enough that they warrant repetition. And I promise, there are a few new ones too. For your benefit, I’ll list them here, and you can jump the page if you don’t want to re-read anything:
- The periodic transfer
- Direct deposit to a brokerage account
- Bonuses
- Tax Returns
- “Saved” Expenses
- Round-ups
- Gift Pot
Before diving in, I’ll add the caveat that these methods are tailored to saving funds in addition to what you may be saving in a pre-arranged 401(k), IRA or other type of dedicated retirement amount. These methods are geared toward helping save additional cash in a brokerage account that you’re more than likely to need if you plan to retire early or have some other financial goal.
- The Periodic Transfer
This is the most common, simple method of saving, and by that I mean it’s not an earth-shattering idea. If you’ve determined how much you need to save each year by compiling your own spreadsheet of anticipated returns against anticipated spending, you should have a rough idea of about how much you need to invest to reach the retirement you’re looking for.
If you’ve calculated what you need to save on an annual basis, you’ll want to break this down into manageable chunks that you can actually afford to stash away periodically, say bi-weekly or monthly. The important thing to consider is making it doable. You don’t want to set unreasonable expectations that you can’t possibly meet, and then be disappointed when you can’t meet them. So break down how much you need to save and decide the intervals at which you’ll accomplish it.
If, for example, you determine that you want to put $26,000 per year into a brokerage account – what’s the best way to accomplish this? If you get paid bi-weekly, then you’ll have 26 pay periods each year, which breaks down into a neat $1,000 per pay period that goes into your investment account. Simple, right? Perhaps, so long as you can afford to take $1,000 of disposable income every other week and stash it away for later.
Maybe it’s more feasible to put away $12,000 per year, which equates to $1,000 per month. In this case, you can either do $1,000 when you receive one of your two paychecks for the month, or you could do $500 per paycheck (take into the account the two months with three pay periods). Choose whichever pill you can swallow.
The periodic transfer depends primarily on you to take the action of transferring money out of your primary checking account and into your investment account. You’re the one that has to hit “Confirm” on the transaction page. This autonomy can be good or bad. For one, it allows you to be in control of your finances and to implement the action that works for you. On the other hand, because you’re giving yourself discretion, you may be tempted at times not to make your periodic transfer.
It’s for this reason that it’s good to establish set intervals. It gives you a defined action, like a monthly payment that’s among the multitude of others that you have to make. If circumstances change and you don’t have the liquidity when you’d otherwise planned to make a contribution, that’s fine, you can adjust. But the idea of regular, periodic intervals is to establish a routine with the goal of not missing any transfers. It’s also why if the chunks are manageable, you’ll be less likely to miss them.
Think of it this way – it’s seemingly much easier to make a $500 transfer every two weeks than a $6,000 deposit every six months. Parting with $6,000 all at once is bound to take more fortitude because you’ll start to envision tangible things you could be doing with that money right now. Another first class vacation to Hawaii sounds lovely indeed! These are the sorts of things you have to bypass with your regularly scheduled contributions or you’ll never reach FIRE.
So, in sum, the periodic transfer means choosing regular intervals for your contributions in manageable chunks and manually transferring the money to your investment account on those intervals. Not exactly ground-breaking advice, but there’s more to it than beats the eye.
- Direct Deposit to Brokerage Account
I talk about this one in other places, and the reason why should be apparent. This technique is like the periodic transfer, but takes all the discretion – and hopefully, the temptation – out of your hands.
The first part of the direct deposit technique is the same as the periodic transfer. Decide how much you want to contribute to your retirement savings. But, this time, you’ll plan to make those transfers on scheduled intervals directly out of your paychecks.
To implement this approach, determine how much you’re willing – and can afford – to take from each paycheck. Then adjust your direct deposit to route that amount into your brokerage account out of each check. Most employers should allow you to do this. You can take say, $500, and have it deposited to your investment account with the rest going to your primary checking account. Piece of cake – you end making your $500 contribution with every paycheck, and you can make additional contributions manually.
A slightly more risque alternative is, instead of setting a defined amount to be deposited into your investment account from each paycheck, you set a specific amount to go to your checking account (how much you absolutely need for day to day expenses) and let the remainder go to your brokerage. This might induce some variability into how much you invest, but is a good way to capture the portion of your paycheck that exceeds the cash you need now.
If your paycheck is essentially the same each pay period, the result here would be that the same amount goes into your brokerage account each pay period. If your pay goes down, then the same base amount will still go to your checking account to use on your day to day expenses, with less cash invested. If you fall behind your investment target, you’d have to make it up manually, if you can afford to do so. At least this way, however, investing won’t interfere with the money you need to meet your current needs.
But, if your pay goes up for any reason, you’ll get the added bonus of additional money to invest. This might happen toward the end of the year, when, for example, you’ve hit the maximum contributions to social security or your 401(k). When your deductions shrink and your paycheck goes up accordingly, you’ll capture those additional funds in your investment account without having to do anything and without having to overcome the psychological factor of disposing of the additional cash flow you just gained. This is why the direct deposit method works – because it takes away the temptation to spend that additional cash rather than invest it.
Setting a defined amount to go to checking with the remainder to your investment account also helps you increase your contributions when you – if you’re so lucky – get a raise. By keeping your disposable income steady, you reap the benefit of saving the extra money, which can help you avoid the inevitable “lifestyle creep” that comes with higher paychecks. (Lifestyle creep means buying more expensive things when you have more money, and is a difficult cycle to break).
If for some reason your employer can’t or won’t allow you to deposit your checks into multiple accounts, you can do it manually, but there’s more work involved. Most brokerage accounts will allow you to set up automatic transfers on the interval of your choosing. You can set them up to align with when you receive your paycheck, making it effectively the same thing as direct deposit. The only difference with this method is that you have to set a fixed amount for each transfer. If you do get a higher paycheck for some reason, you’ll have to go in manually and transfer the additional funds to your investment account. Resist the temptation to spend that money!
One technical aspect of direct deposit to a brokerage account: the routing number – which you need for direct deposit – may not be entirely obvious. Typically when you set up direct deposit with your employer, you provide the routing and account numbers by giving them a blank, voided check. You may not have checks for your investment account to use for this – some offer them, some don’t – and in any event, you probably don’t want checks while you’re saving because the goal is not to spend that money.
Nevertheless, call the brokerage and ask for the information you need. Some of them have forms you can use to give to your employer with the information they need. You may also need to explain to your Human Resources department why you’re not giving them a voided check (which might be easier said than done…) If your brokerage has the information sheet they can give you, you can provide that to HR, and hopefully quell their anxiety that you’re trying to deposit money in the wrong account (as if someone would do that).
Overall, I like this approach because it works similar to the way a 401(k) does. Done right, you never see the money and there’s no temptation to defer a contribution or otherwise use it. Sure, you could just withdraw it, but hopefully that extra step is just enough to allow your better judgment to kick in. That money goes into savings, and will be there when you need it – hopefully sooner rather than later.
- Bonuses
The annual bonus. What a treat. And I call it a treat because they’re not as common as they once were across the board. Sure, if you work in finance or other office-type settings, they’re still common methods of compensation, but in other industries they’ve either shrunk or have started to disappear. If you’re lucky enough to be the recipient of one, you’ve got another great opportunity to invest.
Unless your bonus is compensating you for an otherwise low base salary, your bonus may be exactly what it’s called – a true “bonus.” If that is in fact the case, then, by all means, plan to live your life without it, and when it comes, put it in your investment account and never think about spending it. Again, another case of easier said than done. The temptation to spend that extra, unplanned money is definitely real and difficult to overcome. But if you hadn’t factored a bonus into the amount of money you need for day to day expenses, it’s a fantastic way to supplement your annual savings and boost your ability to retire early.
Think of it this way – you’re not “foregoing” spending it. You’re foregoing spending on tangible things now. Or, think of it as using the cash to purchase the one non-renewable resource in the world – time. And, when you have that time, the bonus money will be there, with accumulated returns, for you to do with it what you please.
- Tax Returns
Tax returns fall into a similar category as bonuses. They’re essentially unexpected, they’re variable, and you probably don’t account for a tax return in figuring out how much you need for your day to day expenses. (You might, but only if you’re the type to figure out in advance exactly how much you’ll be getting).
Another nice aspect of U.S. tax returns is that you can have them direct-deposited into the account of your choosing. If you’re a fan of the direct deposit method of investing, here’s a chance to extend it further.
- “Saved” Expenses
This one’s a little more subjective, and requires you to use your judgment and have a certain amount of discipline. And while I do think this is a good method to use from time to time, you have to make sure you don’t let it dictate your entire life.
The “saved” expenses method entails depositing money into your investment account that you saved elsewhere by doing something that costs less than what you might have otherwise planned to do. A description like that gives this technique no justice, so let’s go straight to examples.
Say you were planning to go to a restaurant one night where you’d spend $100 on dinner and drinks. But, for whatever reason, you end up staying home and cooking dinner and having a glass of wine, for a total cost of about $25. The reason you stayed home is not important, whether the dinner was canceled, or you decided not to go. The idea here would be to deposit $75 into your brokerage account – an amount that you just “saved” by not doing the expensive thing.
Or say you typically fly first class (lucky you), but instead, in a flash exercise of prudence, you end up flying coach. If the fare difference between the two classes of service is $300, deposit that much into your investment account. See how this is going? You can extend the example to anything: cheaper hotel rooms, cars, computers, and so on.
It’s up to you to make a judgment call whenever you’ve “saved” money this way. Obviously it takes some discretion to conclude that you “would have” done something one way before ending up doing it more frugally. And this method assumes you have the cash on hand to deposit into your brokerage account – in theory you should, if you were truly going to spend it in the first place, but you get the idea.
This method is a way of adjusting your lifestyle by making sacrifices now so that you can enjoy a little bit of freedom later. But as I stated in the intro, don’t let this take over your life. You have to do things you enjoy at times, if you have the money to do so, or the concept of saving might consume you.
- Round-ups
More and more banks are offering this with their debit cards nowadays, and while it’s not the most lucrative, it’s a start. This method takes the difference between your purchase amount and the next dollar and deposits it into a savings account. So everything you purchase ends up being a whole dollar figure, but some of that money is automatically transferred into savings.
An example is again a better way to illustrate it. If your total at a store is $15.24, and you use a card with this feature, the debit will show up on your statement as $16. That additional $0.76 is deposited into your savings account. In effect, you’ve forced yourself to save money without having to think about it, but because the difference is incremental, you almost don’t notice it.
A few caveats to this method. First, I don’t know of any arrangement that can automatically set this up to transfer the round-up difference to a brokerage account. If you have this, it most likely goes to your savings account, so you’d have to transfer the money over. Also, this feature is usually only available on bank-issued debit cards, on which you’re foregoing opportunities to do much more with the money you spend on it. So, I would only use this method if getting started – say, if you’re on the younger side. If you have the credit and discipline to use credit cards, you’re better off getting the rewards than favoring a debit card that rounds up into a savings account.
Plus, you won’t accumulate all that much with this method, which is why it’s best for someone who’s just starting out and needs to find a way to start saving. Think about it – how many transactions do you actually make each month? Even if you make every single purchase on a card, maybe on the high side you’d have 40-50 per month. And each of those is a fraction of a dollar, so you probably save at most $30 per month this way. At $360 per year, this won’t get you to FIRE. But, if you’ve never saved before, or have never been good at saving, this can be a good place to get the ball rolling.
One final note on this method is that you could do it manually. Look at your transactions each month and figure out how much the total round-up would be and then deposit that money into your brokerage account. It’s quite a bit of effort for the marginal amount you’ll actually save up, but again, could be a good place to start.
- Gift Pot
Finally, the last one for now. Short and sweet. From the moment you decide to pursue FIRE or any sort of early retirement, take every monetary gift you receive and invest it. Birthdays, holidays, maybe wedding gifts. The goal here is to take any money that you didn’t plan on receiving and tuck it away. It’s easy and should be less difficult to part with because of the fact that you hadn’t factored getting this money into figuring out how much you need to cover your day to day expenses.
Savings Summary
If you’re still saying to yourself that each of these was pretty obvious, you may be right. But hopefully there was useful information here and maybe it got your thoughts going on different ways of accomplishing your investing goals. Different people save in different ways – some have all the discipline in the world and can put money in their accounts at regular intervals or whenever fit, while others need some structure and rigidity. It’s like everything we do in life, right?
Naturally, there are many more ways to plan for retirement than I’ve listed here. Be creative, but do whatever works for you. If you have a method you’d like to share, go ahead and do so in the comments.
The FIRE Investor's Guide to Early Retirement 