The fact is, you can’t always save. But at the same time, there are times when you can save a lot! Instead of focusing on budgeting and doing a little each month, focus instead on dominating when you can, and not fretting when you can’t.
I’m calling this burst savings.
If you’re not totally following along, I understand – just read below and it will make sense. In fact, you probably already do this subconsciously (I hope).
What The Heck is Burst Savings
Just like it sounds, burst savings is simply stashing away as much as you can when you can do it. However, it also means not worrying too much if you’re not putting away enough other times of the year.
For example, let’s look at a guy named John. He makes $50,000 per year, and gets a 401k through is work. The beginning of the year is always better for John. He gets his review in January based on his performance for the prior year, and that usually includes a raise and a small bonus. Also, he likes to file his taxes early in February because he usually gets a tax refund. Basically, the first 3 months of the year are when John is feeling the richest. This is the perfect opportunity to dominate with burst savings.
To execute a burst savings strategy, John should consider taking his bonus and tax refund and putting it into an IRA. He should also consider ramping up his 401k contributions a lot – I’m talking 25% or more! The goal should be to front load his savings in the year as much as possible. Then, if come summer or fall, John is struggling, he would have at least maximized his savings as much as possible early on.
Why Burst Savings Make Sense
Burst savings is something that most of us typically already do, just maybe not to the extent I’m talking about here. But in order to really highlight why burst savings makes sense, we should look at the opposite of the example above – John not taking advantage of burst savings.
Let’s say John gets his bonus, and also gets his tax refund. But he doesn’t really do anything with it. He also just keeps his 401k at the same level as his company match, say 5%. What happens to all that extra money? Well, if John is like most Americans (at least millennials), he will keep it in cash in his checking account, and slowly spend it all year. In the end, John isn’t any better off than he was when he started.
Here’s some concrete figures to illustrate how burst savings is better than the traditional approach. To illustrate this, let’s consider the following:
- Raise: 5% (or $2,500)
- Bonus: 5% ($2,500)
- Tax Refund is $1,000
- Under the burst savings approach, he can only sustain the higher savings rate for 3 months
- Under the traditional savings approach, John saves 10% of his salary all year
So, what does burst savings get you? In John’s case, it would get him about $1,200 more per year in savings – without saving anything for the last 9 months out of the year.
The Psychology of Burst Savings
The truth is, many of us already STOP saving when it’s painful. But why are we saving more when we’re able to? We simply fall into the trap of doing the same thing over and over again.
Before you dismiss this, I really want you to give it a try – especially with something like your 401k. Go into you HR software, and ramp your 401k contribution to 25%. Really see what it feels like. The worst thing that happens is you go back in the next pay period and lower it back down to where you had it before.
But in reality, you could find yourself not hurting like you thought you would – and you’re also saving more.
Have you ever taken advantage of burst saving (even if you didn’t call it that)? What was your experience?