How to Save Your Money And Never Miss It

Of course you do. We all do. In fact, saving is at the top of our to-do list. But the "saying" part is easy. It's the "doing" that gets us every time.

Because as much as we might want to sock away some cash for those rainy days or an early retirement, our budget tells us there's just no room to squeeze anything else out.

What to do, what to do?

You could try my 10 Ways to Save $1 A Day. You could also read up on where your money really goes. And if you want to pull out all the stops, learn a little positive thinking and try your hand at a few money spells.

But there is one thing, one simple little thing, that you can do to start saving now that will reap you great rewards in the long run. And the beauty part? You won't even miss the cash.

When you get your paycheck, you'll notice a number of different columns. There's your Gross pay which is the amount you started with and then a list of various deductions such as Federal Taxes, Social Security, Health Insurance and yes, your 401(k). The last column will be your Net amount, representing your actual take-home pay.

Now, in that list of deductions, your taxes are calculated last, meaning that all the other deductions come out first. So, if your gross pay is $1500, your employer will subtract your health insurance premiums and 401(k) contributions before your tax is calculated. That means you're not actually paying taxes on $1500 - you're paying taxes on whatever is left over after the deductions are taken out.

This is known as pre-tax dollars, a nifty little way to pay for things that are crucial to your well-being and lower your taxable income in the process.

What does all of this have to do with saving?

Ok, all other deductions aside, let's say you start with $1500. Assuming a 15% tax bracket and no pre-tax deductions, you'll have a taxable income of the full $1500. If you wanted to save 5% of that amount, you'll be taking $75 out of your paycheck and when you calculate your taxes in April, you'll be paying taxes on the full $36,000 a year.

Now, if you made a pre-tax investment instead, that $75 would be taken out before taxes were calculated. That means your taxable income would be $1425 instead of the $1500.

Big deal, you say?

It is when you consider how that adds up. Instead of paying taxes on $36,000 for the year, your taxable income would only be $34,200, almost $2,000 less for the year. Increase your pre-tax contribution and of course, you'd pay even less in taxes.

Is there a catch?

If you invest pre-tax dollars, you'll have to pay taxes on the money when you withdraw it from your plan. Theoretically, the assumption is that you'll be in a lower tax bracket at retirement so you'll pay less in taxes then than you would now. Withdraw the funds before the age of 59 1/2 and you could also be looking at an early withdrawal penalty of 10%.