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Around this time of year, employers typically implement cost-of-living adjustments (COLA) to employee pay. Are you one of these workers (or retirees) receiving a pay bump?
Cost-of-living adjustments are meant to keep pay in pace with inflation—something we’ve all noticed more than usual these past few years. However, we can be strategic with these typically small increases and turn them into a powerful savings tool.
To do this, check how much your paycheck has increased after your COLA adjustment and set up an automatic transfer to send that exact amount to your savings account each payday (or monthly, if you prefer).
This approach avoids the resistance of our natural human loss aversion bias, while quietly building our savings capacity. Because ultimately, we hate cutting things out to tuck money away in savings. But if we send money to savings we weren’t used to even seeing before, it feels like nothing, while serving the very important purpose of keeping an increasingly well-funded savings account.
Simply continue adjusting expenses to maintain your lifestyle with your usual paycheck (even if that means fewer or less classy eggs), while sending your annual pay bumps to savings.
By keeping expenses within your usual monthly income and habitually adding each year’s COLA to savings, you can build a strong savings rate over time—while barely feeling it.
If you don’t already have a monthly automatic transfer into a savings account, using your spring COLA is a great way to start. And if you already do, it’s a great way to keep that monthly savings rate growing larger each year.
Remember, funding your savings means having money for 1) emergencies, 2) unexpected and irregular bills and expenses, as well as 3) building toward your dreams (following my three-layered savings approach).
Because the alternative is that you see an extra $45 or $100 on your paycheck and get that “ah, a little wiggle room” feeling. And then it disappears into the ether as all “extra” money does when it’s not put in an intentional place.
But would you rather have a savings account growing at an accelerating rate each year ($100/month this year, then $205/month next year, then $315 the next…)?
Or would you rather look back and wonder where your money went?
The reality is we can affect our lives, and that of our family and others, in more memorable and meaningful ways with larger chunks of money built over time – whether it’s simply relieving the stress of a broken-down car one year and a dead dishwasher the next, or one day taking that vacation you never thought you’d be able to afford.
Savings is powerful.
And growing it doesn’t need to be painful when you create the right habits. The easiest one to start with is to disappear that COLA on your paycheck each spring straight to the savings account. It’s like it never happened.
Until future-you notices what you did, and thanks you for it.
Try it this year and see how easy it can be to grow your savings.
The two roads that lead to poverty and riches travel in opposite directions.
Napoleon Hill in Think and Grow Rich
I hope you enjoyed this edition of Under 2, an email series designed to share quick bites of wisdom to empower your financial journey (while keeping it short). Be sure to sign-up below to get these messages in your inbox.
All for now,
Lindsey