You already know saving money is critical to your long term financial health. Some of your biggest financial goals are only achievable by saving— like retiring early, paying off your mortgage, putting your kids (or grandkids) through college, or starting your dream business. 

But it’s not enough to just save. How you save and where you save are just as important. By saving smart, you can reach your financial goals faster and with less effort. Plus, smart saving protects your wealth from unnecessary risk, inflation, and the urge to cash out early.

If you’re saving towards your goals on your own, read on to learn the four most common savings mistakes that could be costing you more than you think.

1. Using a single savings account

When you save cash, where do you put it? Most couples only have one family savings account, or one for each spouse. But this makes it difficult to track your savings towards multiple goals. For example, if you’ve been saving for this year’s Christmas gifts, a big vacation, and a home renovation project, but all these goals share one account, it’s easy to accidentally overspend on one goal. Opening multiple free savings accounts, one for each major savings goal, makes it easier and more motivating to track your progress and keep your spending under control.

2. Saving in a low-yield account

Chances are, the savings accounts your bank offers have a very low yield. Every day your money sits in a low-yield account, it loses a little bit of value. There are numerous high-yield accounts available, some through online banks and others through independent financial institutions. Many of these accounts are free to open, so there’s really no drawback to putting your rainy day fund into an account that adds at least a little interest every month.

3. Saving too much— instead of investing

Even in a high-yield savings account, inflation can outpace your money’s growth. Once you have a few months of living expenses saved in your high-yield account, it’s time to look at other places to save your extra cents.  

Sometimes savers swing too far the other way, putting their extra savings into high-risk, high-volatility investments instead of pursuing strategic investments. Over the past year, cryptocurrency has become a popular place for many savers, particularly millennials, to stash their extra income. Crypto, meme stocks, NFTs, and similar investments shouldn’t be the second place you save! While these risky investments do have a place in some portfolios, there are so many savings priorities that should come first.  

4. Overlooking your 401(k) 

Your 401(k) may not be the most exciting place to save. But it is one of the most important— especially if your employer offers matching. 

For a deep dive into how to maximize your employer’s 401(k) plan, check out our easy-to-understand guide: How to Maximize Your 401(k) Contributions and Matching in 2022.

One of the smartest savings moves you can make is funneling as much income as possible into your employer’s plan to maximize matching, tax benefits, and the account’s long-term growth potential. If you own your own business, you can even consider setting up a 401(k)-style plan for your company to take advantage of these great benefits, even if you’re the only employee. 

Remember, where you save and when you save is as important as how much you save

When it comes to saving smart, have a prioritized order for your savings plan. Here’s an example of a typical savings priority plan: 

    1. Build up your emergency savings to cover three months of expenses
    2. Take advantage of your employer’s 401(k) matching
    3. Max out your HSA
    4. Max out your Roth IRA
    5. Contribute any leftover savings to your 401(k)

Your specific savings plan may vary a bit from this model, but the point stands. Many people focus too much on the investing side of the equation, but forget that traditional savings is equally as important. Think of it this way: If you have the nicest, fastest car, but you don’t fill it with gas, you’re just not going to get very far. Savings is the fuel in your car.

How to save the right way

We advise automating as much as you can. Have that earmarked money drafted directly into your savings account, if possible. When you automate your savings, you’ll quickly adjust to your new monthly income. Soon, you won’t even notice how much you’re taking out of your check to fund your savings plan. But you’ll benefit from that good habit for years to come. 

Automating your savings accounts isn’t the only way to streamline your savings. Many 401(k) plans allow for an annual increase. You can select to have your 401(k) contribution increased by just 1% or 2% each year, automatically. This is a great way to “trick” yourself into saving more without really feeling the squeeze.

One more note for high-earning savers: Have a plan in place for when you reach the Social Security wage limit each year. Once you earn $147,000 in wages, your employer will stop deducting Social Security taxes from your paycheck. That adds up to a 6.2% “raise” on every single check left in the year. And that bonus cash is a great way to accelerate your savings growth. Use that extra cash to increase your 401(k) contribution, use the extra income to build up your other savings buckets, or begin saving in a non-retirement investment account. If you fail to plan for this extra cash, you’ll find ways to spend it! But if you’ve got a strong plan in place, this bonus can make reaching your savings goals even easier. 

At Cook Wealth, we help our clients save smarter with a customized plan 

One of the most important things a Wealth Advisor can do is help you put a savings plan in place and be a partner to help you stick to those savings goals. It can be overwhelming to figure out how much you should save where. But at Cook, we help you build an effective, realistic savings plan that empowers you to reach your goals while still enjoying your earnings today. 

When you get that unexpected bonus or tax refund, having an advisor on speed dial, one you can trust to help you decide where to put those funds, is crucial. Without a specific plan, most people won’t take smart actions with surprising windfalls. As a result, they’ll either save to the wrong places, missing out on big opportunities, or will spend the extra on everyday expenses. That’s why having an advisor by your side is so valuable in the long run.