3 smart moves that can help you save more money

The middle class is finally getting a raise
The middle class is finally getting a raise

I'm just starting out and I've already opened a savings account, but I'm looking for ways that I can save more money. Any suggestions? --G.J.

This is the point at which many personal finance gurus rattle off a list of specific things you can do to pare expenses and plow more dough into your savings account.

Among the usual suggestions: pull the plug on cable TV, sign up for every customer rewards and loyalty program you can, eat out less often, buy clothes off season at discount outlets and, the ever popular, cut back on those morning lattes. (There's even a Latte Factor Calculator that shows you can theoretically end up with a hundred thousand bucks or more over the course of many years by foregoing small purchases and investing the dough instead.)

And if you don't mind obsessing over ever cent you spend, I suppose this method can work, although, frankly, I think it's impractical to expect that most people will actually invest the five bucks or whatever they save on java every day or have the discipline to stick to such a regimen over the long term. Besides, there's nothing wrong with occasionally indulging in inexpensive treats. Indeed, research shows that buying many small pleasures actually give us more satisfaction than fewer large ones.

So when it comes to saving money, I recommend a different approach. Specifically, I think it makes more sense to arrange things so that you're in a better position to save more for an emergency fund, your retirement nest egg, general financial security, etc. without fussing over every little expenditure or feeling that you're living a life of perpetual denial.

Here are three ways to do that:

1. Reverse the conventional approach to saving. Most of us go about saving the wrong way. We shell out from our paycheck whatever it takes to cover our expenses and, if any money is left over, maybe we stash it into savings.

Trouble is, often nothing is left over, and even if some dough remains, we often find something else we "need" to spend the money on.

Solution: Do the exact opposite -- that is, set a savings target (10% to 15% of your annual income is a reasonable figure, although you can start with less and work your way up) and then base your lifestyle on the income you have left after you've already saved. In effect, this forces us to do what we already know we should do to save but find so hard to pull off: live below our means.

Of course, for this strategy to work, you've got to actually meet and then stick to your savings target. The best way to do that is to put your savings regimen on autopilot so that money goes into your savings and investment accounts before you get your hands on it.

So, for example, if you work for a company that offers a 401(k) or similar workplace retirement savings plan, you can sign up to have, say, 10% or 15% of your salary automatically deducted from your paycheck and invested in your account. You'll also get a tax break in that your contributions (and investment earnings on them) go untaxed until they're withdrawn. And most employers will match a portion of what you contribute to the plan, which effectively allows you to boost savings without having to further reduce your spending.

Calculator: How fast will my savings grow?

If your employer doesn't provide a 401(k) or similar plan, you can always sign up for an automatic investing plan. Offered by most mutual fund companies, these plans will automatically transfer money each month from your checking account to a mutual fund.

One way or another, though, the idea is to arrange things so that you limit your spending to what's left of your income after saving, instead of the other way around.

2. Avoid ratcheting up your lifestyle every time you get a raise. It's natural that as we earn more, we tend to spend more. After all, our brains are hard-wired for immediate gratification. So if a larger salary means we can afford a bigger house in a fancier neighborhood, a luxury car pimped out with every imaginable amenity or increasingly lavish vacations, chances are we'll spring for them.

But there's a way to enjoy the benefits of rising earnings while simultaneously boosting your savings rate so you have a better shot at achieving financial security.

Instead of allowing all of your extra income to go toward spending more and living larger, devote a portion (say, half or so) of any raises you get to savings. By doing that, over the span of several years you should be able to go from saving, say, 10% of annual pay to 15%, while still leaving extra cash for you to spend. To see just how big an effect even small increases in annual savings can amount to over the course of many years, you can check out this Savings Interest Calculator.

3. Become a smart investor as well as a diligent saver. Another way to effectively save more is to get a better return on the money you manage to save. You don't want to overdo the pursuit of higher gains by taking undue risks. But there is a prudent way of earning a better return: hold the line on investment costs.

The best way to do that is to stick as much as possible to low-cost investments like index funds and ETFs. Compared to actively managed mutual funds, many of which charge upwards of 1% a year or more in expenses, you can easily find index funds and ETFs that charge 0.20% annually or less.

Over the course of long career, reducing annual expenses by just a half a percentage point a year has the potential to boost the eventual size of your savings balance by almost 10%.

In addition to reducing investment costs, you'll also want to be sure you're following a sensible investing strategy. Which means that after setting aside three to six months' worth of living expenses in a secure stash like an FDIC-insured savings or money-market account, you'll want to invest the rest of your savings in a diversified mix of stocks and bonds that has the potential to make your money grow but also jibes with the level of risk you're willing to take. For help in building such a portfolio, you can go to this risk tolerance-asset allocation questionnaire.

Asset allocation: Fix my mix

Of course, there's nothing to prevent you from also taking the more conventional approach of looking for specific items in your budget for savings, in which case I suggest you focus on major expenses like housing and transportation (which includes the cost of owning and operating a car). Those two areas are fertile ground for cost cutting, as together they alone account for about 50% of the average U.S. household's spending, according to the Bureau of Labor Statistics' Consumer Expenditures Survey (although discretionary outlays for entertainment, travel, vacations and such can also be good targets for possible savings).

At the end of the day, though, if you really want to increase your chances of saving as much as possible over the long term, I suggest you take the big-picture approach and make the three moves I've outlined above the foundation of your savings strategy.

Getting started

Getting a job

Buying a car

Starting to invest

Buying a home

Starting a family

Retirement planning