How to create a savings plan that really works

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Businessman Dropping Clock Into Piggy Bank

Businessman Dropping Clock Into Piggy Bank

Editor’s Note: One of the most popular New Year’s resolutions this year will be to “save more, spend less.” It’s also among the most likely be broken.

Saving isn’t easy. We’re constantly tempted to buy things, we’re inundated with advertisements and told some variation of “There are some things money can’t buy. For everything else there’s Mastercard.”

The Index Card

In “The Index Card: Why Personal Finance Doesn’t Have to Be Complicated,” journalist Helaine Olen and Harold Pollack, a professor at the University of Chicago, say that keeping personal finances in order can be boiled down to 10 rules, and they are, in fact, simple. And saving is simple. You just have to know how.

Olen and Pollack wrote “The Index Card” after Pollack interviewed Olen about her recently published book, “Pound Foolish.” In an offhand suggestion, Harold suggested that all necessary financial advice could be written on an index card. Pestered by readers to divulge exactly what that financial information was, Harold posted a crude image of a four-by-six inch index card. It went viral.

Fast forward a few years, and today, we have a book that guides us through just those steps. Here’s rule number one: “Save 10 to 20 Percent of Your Income.” Below, we have an adapted excerpt from that chapter. For the other nine rules, including where to invest and how to manage debt, check out “The Index Card,” published Jan. 5, 2016.

Kristen Doerer, Making Sen$e Editor

Consider these facts:

  • Our national savings rate has been in the low single digits for 25 years.
  • A little more than a quarter (27 percent) of American households have net worths of $5,000 or less.
  • Forty-seven percent of us report that we could not come up with $400 if we needed to without selling something, resorting to increased credit card debt, borrowing from a friend or relative or taking out a payday loan.

That’s the world we live in. It isn’t easy to step out.

Learn. How. To. Save.

Without learning how to save, you won’t be able to invest or pay down debt effectively. This is true no matter what your financial position.

How much should we save? you ask. Well, the title of this chapter pretty much says it: 10 to 20 percent of your gross income, the amount listed on your paycheck before taxes and everything else are taken out.

Just think about this: If you can put aside 10 percent of each paycheck, you will have more than one month’s salary set aside in your first year! As an added bonus, you’ll experience a whole lot less financial stress and drama along the way.


You can’t begin to save until you educate yourself about where and how you are spending your money. Chances are you don’t know. According to a 2013 survey by the pollster Gallup, two-thirds of us do not keep even the most rudimentary of budgets. That was certainly Harold’s reality.

You need to determine what day-to-day spending is necessary and unavoidable, what is a luxury but helps you get through the day and finally, what is excess. Only then can you avoid falling prey to spending traps.

This allows you to make trade-offs: I’ll take advantage of the office coffee machine, but I’ll use the money I saved to travel to Italy next summer to attend my best friend’s wedding. I’ll drop my landline phone to pay for my gym membership or boost my child’s college savings.

So how do you do this?

You can’t do this by simply looking at your monthly bills. You need to look at everything. That’s your day-to-day spending as well as your regular expenses.

Step 1: Monitor your spending

For three months, keep track of everything you spend money on, no matter how small. That $1.50 bag of Cape Cod Waffle Cut Sea Salt potato chips? It counts, just as much as your four-figure mortgage or health insurance payment.

It sounds like a time-consuming project, but it’s not. Websites, programs or apps like and will automatically collect and categorize every credit or debit card transaction. You can even snap pictures of your receipts with your smartphone. All you need to do at the beginning is sign on every couple of days to make sure they are assigning things to the proper categories, not to mention input cash spending. (If you wait more than a week, you will begin to forget what’s what.)

You can’t know what you are spending until you actually see the dollars and cents laid out right in front of you. Dividing every expense into categories like “Children’s school expenses” and “Groceries” allows you to see the big picture. Otherwise, you don’t know where your money is

Step 2: Confront your spending

At the end of the first month, look over your categories, and see how much you are spending in each. The first month will give you a sense of your recurring, nonnegotiable, nondiscretionary expenses: rent or mortgage, health insurance, car payments, gas, child care and so on.

Step 3: Refine your expenses over time

If you monitor only one month of spending, you won’t gain a full picture of where your money goes. Routine but sporadic expenses such as car repairs, doctor bills and the emergency trip to the cat’s vet are more likely to occur over a several-month period.

Over the period of three months, you’ll get a good sense of your other expenses: pet care, entertainment, dining out and the other things conveniently charged on your credit card at random intervals.

Step 4: Create a plan

A realistic spending and savings plan accounts for how much you earn and how much you wish to spend, and it leaves room for flexibility: Money for dining out, say, can be repurposed if you spend a bit more on computer equipment one month than you had otherwise accounted for.

While many people call this budgeting, it’s more helpful to think of it as surfing a financial wave. A budget sounds fied. But while certain expenses can be planned and occur as regularly as waves — think of your rent or mortgage, for example — others cannot. As a result, the size and shape of this financial wave changes somewhat from month to month.

According to a report released by the JPMorgan Chase Institute, four out of five of the bank’s customers studied experienced both a 5 percent variation in money coming in and their spending over the course of a year. One way to handle this? Know your regular and large expenses, monitor your other spending and adjust as needed.

Step 5: Make sure to leave room for fun

See a movie, attend a concert, eat dinner out with a loved one a few times a month. Remember, starvation budgets work no better than starvation diets


So how do you pry that money out of your wallet and get it to start working for you, not against you?

Make it automatic.

When savings is automatic, the money goes into some sort of separate account without your having to make it happen every month and without its passing through your own fingers with all the accompanying temptations.

We don’t need to think about whether we can afford to save, because . . . well, there is always something.

If you work at a traditional job, when you sign up for direct deposit, there is often an option for targeting some of those funds for savings. Use it. If you are freelancer like Helaine, money comes in more erratically, and it is hard to set a monthly target. So what does Helaine do? All incoming funds are deposited to her savings account. She then grants herself a monthly “salary.”

A motivational tip: Many banks, credit unions, and brokerages allow their customers to set up what we call subaccounts. Those are accounts that operate under the rubric of your main account but sometimes (not always) have a different account number. This is a good one for people putting money aside for multiple goals, whether emergencies or winter getaways to the Caribbean. If you need some added incentive, consider giving your accounts names so the money doesn’t feel so abstract. A few years ago, ING Direct (now Capital One) told the New York Times that the most common nicknames for their sub-savings accounts were the following:

1. Savings
2. Vacation
3. Emergency fund/rainy day
4. House
5. Taxes

Excerpted from “The Index Card: Why Personal Finance Doesn’t Have to Be Complicated” by Helaine Olen and Harold Pollack, in agreement with Portfolio, an imprint of Penguin Publishing Group, a division of Penguin Random House LLC. Copyright © Helaine Olen and Harold Pollack, 2016.