MONEY Careers

The Stock Market Is No Place for Millennials

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Roberto Westbrook—Getty Images

Investing in yourself, not the S&P 500, often makes more sense for young adults.

When most people think of investing, they think of the stock market. But that is rarely the best place for young professionals to invest their hard-earned money. Instead, they need to be investing in themselves.

You’ve undoubtedly heard that it’s important to start investing early for retirement. Whoever tells you that will most likely mention the concept of compound returns, as well.

Compound returns are great. Heck, it’s widely repeated that compound interest is the eighth wonder of the world. But I’m not sold on the stock market strategy for twentysomethings with limited cash flow.

Most recent graduates come out of school filled with theoretical knowledge about their major. Although this knowledge can be useful at times, it is often a challenge to apply it to real-world situations. It’s kind of like dudes with “beach muscles”: They hit the gym hard every day so they can look great on the beach. If they ever get into an altercation and actually have to use their strength, though, they fail miserably. That’s because they have no practical experience.

The same goes for theoretical knowledge in the real world.

We never learn about life in college. We don’t learn how to make or manage our money. We are not taught how to communicate effectively or be a leader. And we certainly do not get trained on how to create happiness and love in our lives. These are the valuable things we need to learn, yet we get thrown out into the world to fend for ourselves. So we have to take it upon ourselves to learn and grow organically after college.

The good news is there are plenty of programs, courses, and seminars that actually teach this stuff. But they cost money.

It’s this type of education that I am referring to when I say that young professionals need to invest in themselves. The notion that the stock market will set you free (in retirement) is only half right. It does not take into account myriad possibilities, one of which is that investing in yourself early in your career may be a better choice.

Let’s assume that you start out making $50,000 a year and indeed have a choice. Here are two simplified scenarios:

Option 1: You invest in a taxable investment account every year from the age of 25 to 50, starting with $5,000, or 10% of your first-year salary. Both your salary and your yearly retirement contribution grow 3% annually throughout your career. In year five, you’ll be making nearly $58,000 annually, and you’ll be putting $5,800 away toward your retirement. And assuming the investment vehicle has a 7% compound annual growth rate, you’ll have $350,836, after taxes, in 25 years.

Option 2: You take that initial $5,000 and invest in yourself every year for five years. You choose to attend various training programs covering the areas of leadership, communication, and other practical skills that you can put to use immediately. You gain life knowledge, allowing you to perform better and maybe even connect with a career about which you are passionate. As such, your income increases by 50% over five years — to $75,000 — rather than simply inching up by 3% per year to $58,000. Then, in year five, you start contributing about $17,000 per year to your retirement ($5,800 plus all the extra money you’re earning, after taxes). Projecting forward 20 years using the same rates for contribution growth and investment returns as in Option 1, you’d end up with $829,635 after tax.

After playing out both scenarios above, we can see that Option 2 leaves you with $479,000 more than Option 1 does.

Certainly, I have made a few assumptions — one of which is that you invest all your extra earnings in Option 2 rather than raise your standard of living. And there is no guarantee that by investing in ourselves, we will increase our income. However, this same argument can be made for investing in the stock market. The difference is that by investing in ourselves, we maintain control over that investment. It’s up to us to learn necessary life skills to excel at whatever we choose as a career or life mission.

On the other hand, when we hand over our money to the stock market, we give away that control, basing all results on historical averages. I’m a big proponent on focusing on what we can control. And, as young professionals, our biggest asset is our human capital, or our ability to earn income. Why not focus here first, and save the investing for tomorrow, when our cash flow is at a much healthier level?

———-

Eric Roberge, CFP, is the founder of Beyond Your Hammock, where he works virtually with professionals in their 20s and 30s, helping them use money as a tool to live a life they love. Through personalized coaching, Eric helps clients organize their finances, set goals, and invest for the future.

MONEY 401k plans

The Number of 401(k) Millionaires Has Doubled. Are You on Track to Be One?

It takes steady saving and lots of time—but it can be done. If you're on track to reaching the million-dollar mark, share your secrets with us.

The six-year-old bull market is boosting the ranks of newly-minted millionaires. Fidelity Investments reports that the number of workers with $1 million or more in a 401(k) retirement account has more than doubled over the past two years. Granted, those 72,379 accounts represent a small fraction of savers, but the growth has been big: Two years ago, Fidelity, one of the largest 401(k) plan providers, managing some 13 million accounts, reported only 34,920 one-million-dollar-plus balances.

To be sure, with an average salary of $359,000, a lot of these workers are big earners. (Still, more than a thousand earn less than $150,000 a year.) But good savings habits are helping them get them to the $1 million mark too. The average annual contribution for 401(k) millionaires was $21,400, vs. $6,050 for people with less than $1 million in their accounts. Betting heavily on stocks during this bull market has been a boon as well. The group holds 72% of their accounts in stocks on average. And they are disciplined about not raiding their plans early.

This $1 million mark may seem daunting—even unreachable—but remember that the average age of a 401(k) millionaire is 60. Reaching $1 million takes a career’s worth of saving money. You could be on track to become a 401(k) millionaire by the time you retire if you have $90,000 in your 401(k) at age 40, or $350,000 as late as 50. Consistently saving 15% of your pay a year is a good first step.

Are you a 401(k) millionaire—or on the road to becoming one by the time you retire? Let us know how you are doing it. Are you putting away the max in your 401(k) year in and year out? Are you socking away all your raises? Are you power saving when a big expense like paying college tuition for your kids falls away? What’s your investing strategy?

Tell us your story, and we might use it in an upcoming issue of MONEY magazine. Use the form below to tell us about how much you’ve saved so far, what you do and roughly what you make, and what your saving strategy is. We’ll be in touch for more information if we’re considering your story for publication. We look forward to learning your secrets of becoming a millionaire!

 

MONEY Retirement

POLL: Will You Save More for Retirement This Year?

large golden egg with coin slot
Joe Clark—Getty Images

Planning to really sock it away in 2015? Or, maybe you have other plans for your cash. Tell us about it.

MONEY retirement planning

Why Women Are Less Prepared Than Men for Retirement

Women outpace men when it comes to saving, but they need to be more aggressive in their investing.

Part of me hates investment advice specifically geared towards women. I’ve looked at enough studies on sex differences—and the studies of the studies on sex differences—to know that making generalizations about human behavior based on sex chromosomes is bad science and that much of what we attribute to hardwired differences is probably culturally determined by the reinforcement of stereotype.

So I’m going to stick to the numbers to try and figure out if, as is usually portrayed, women are actually less prepared for retirement—and why. One helpful metric is the data collected from IRA plan administrators across the country by the Employment Benefit Research Institute (EBRI.) The study found that although men and women contribute almost the same to their IRAs on average—$3,995 for women and $4,023 for men in 2012—men wind up with much larger nest eggs over time. The average IRA balance for men in 2012, the latest year for which data is available, was $136,718 for men and only $75,140 for women.

And when it comes to 401(k)s, women are even more diligent savers than men, despite earning lower incomes on average. Data from Vanguard’s 2014 How America Saves study, a report on the 401(k) plans it administers, shows that women are more likely to enroll when sign up is voluntary, and at all salary levels they tend to contribute a higher percentage of their income to their plans. But among women earning higher salaries, their account balances lag those of their male counterparts.

It seems women are often falling short when it comes to the way they invest. At a recent conference on women and wealth, Sue Thompson, a managing director at Black Rock, cited results from their 2013 Global Investor Pulse survey that showed that only 26% of female respondents felt comfortable investing in the stock market compared to 44% of male respondents. Women are less likely to take on risk to increase returns, Thompson suggested. Considering women’s increased longevity, this caution can leave them unprepared for retirement.

Women historically have tended to outlive men by several years, and life expectancies are increasing. A man reaching age 65 today can expect to live, on average, until age 84.3 while a woman can expect to live until 86.6, according to the Social Security Administration. Better-educated people typically live longer than the averages. For upper-middle-class couples age 65 today, there’s a 43% chance that one or both will survive to at least age 95, according to the Society of Actuaries. And that surviving spouse is usually the woman.

To build the portfolio necessary to last through two or three decades of retirement, women should be putting more into stocks, not less, since equities offer the best shot at delivering inflation-beating growth. The goal is to learn to balance the risks and rewards of equities—and that’s something female professional money managers seem to excel at. Some surveys have shown that hedge fund managers who are women outperform their male counterparts because they don’t take on excessive risk. They also tend to trade less often; frequent trading has been shown to drag down performance, in part because of higher costs.

Given that the biggest risk facing women retirees is outliving their savings, they need to grow their investments as much as possible in the first few decades of savings. If it makes women uncomfortable to allocate the vast majority, if not all, of their portfolio to equities in those critical early years, they should remind themselves that even more so than men they have the benefit of a longer time horizon in which to ride out market ups and downs. And we should take inspiration from the female professional money managers in how to take calculated risks in order to reap the full benefits of higher returns.

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

Read next: How to Boost Returns When Interest Rates Totally Stink

MONEY retirement planning

Why Obama’s Proposals Just Might Help Middle Class Retirement Security

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Andrew Harrer—Bloomberg via Getty Images U.S. President Barack Obama delivering the State of the Union address to a joint session of Congress at the Capitol in Washington, D.C., U.S., on Tuesday, Jan. 20, 2015.

Congress probably won't pass an auto IRA, and Social Security is being ignored. But the retirement crisis is finally getting attention.

Remember Mitt Romney’s huge IRA? During the 2012 campaign, we learned that the governor managed to amass $20 million to $100 million in an individual retirement account, much more than anyone could accumulate under the contribution limit rules without some unusual investments and appreciation.

Romney’s IRA found its way, indirectly, into a broader set of retirement policy reforms unveiled in President Obama’s State of the Union proposals on Tuesday.

The president proposed scaling back the tax deductibility of mega-IRAs to help pay for other changes designed to bolster middle class retirement security. I found plenty to like in the proposals, with one big exception: the failure to endorse a bold plan to expand Social Security.

Yes, that is just another idea with no chance in this Congress, but Democrats should give it a strong embrace, especially in the wake of the House’s adoption of rules this month that could set the stage for cuts in disability benefits.

The administration signaled its general opposition to the House plan, but has not spelled out its own.

Instead, Obama listed proposals, starting with “auto-IRAs,” whereby employers with more than 10 employees who have no retirement plans of their own would be required to automatically enroll their workers in an IRA. Workers could opt out, but automatic features in 401(k) plans already have shown this kind of behavioral nudge will be a winner. The president also proposed tax credits to offset the start-up costs for businesses.

The auto-IRA would be a more full version of the “myRA” accounts already launched by the administration. Both are structured like Roth IRAs, accepting post-tax contributions that accumulate toward tax-free withdrawals in retirement. Both accounts take aim at a critical problem—the lack of retirement savings among low-income households.

The president wants to offset the costs of auto-IRAs by capping contributions to 401(k)s and IRAs. The cap would be determined using a formula tied to current interest rates; currently, it would kick in when balances hit $3.4 million. If rates rose, the cap would be somewhat lower—for example, $2.7 million if rates rose to historical norms.

The argument here is that IRAs were never meant for such large accumulations; the Government Accountability Office (GAO) looked into mega-IRAs after the 2012 election, and reported back to Congress that a small number of account holders had indeed amassed very large balances, “likely by investing in assets unavailable to most investors—initially valued very low and offering disproportionately high potential investment returns if successful.”

The report estimated that 37,000 Americans have IRAs with balances ranging from $3 million to $5 million; fewer than 10,000 had balances over $5 million.

Finally, the White House proposed opening employer retirement plans to more part-time workers. Currently, plan sponsors can exclude employees working fewer than 1,000 hours per year, no matter how long they have been with the company. The proposal would require sponsors to open their plans to workers who have been with them for at least 500 hours per year for three years.

These ideas might seem dead on arrival in the Republican-controlled Congress. But the White House proposals add momentum to a growing populist movement around the country to focus on middle class retirement security.

As noted here last week, Illinois just became the first state to implement an innovative automatic retirement savings plan similar to the auto-IRA, and more than half the states are considering similar ideas.

These savings programs are sensible ideas, but their impact will not be huge. That is because the households they target lack the resources to sock away enough money to generate accumulations that can make a real difference at retirement.

Expanding Social Security offers a more sure, and efficient, path to bolstering retirement security of lower-income households. If Obama wants to go down in the history books as a strong supporter of the middle class, he has got to start making the case for Social Security expansion—and time is getting short.

Read next: Why Illinois May Become a National Model for Retirement Saving

MONEY retirement planning

4 Tips to Plan for Retirement in an Upside-Down World

upside down rollercoaster
GeoStills—Alamy

The economic outlook appears a lot dicier these days. These moves will keep your retirement portfolio on course.

Gyrating stock values, slumping oil prices, turmoil in foreign currency markets, predictions of slow growth or even deflation abroad…Suddenly, the outlook for the global economy and financial markets looks far different—and much dicier—than just a few months ago. So how do you plan for retirement in a world turned upside down? Read on.

The roller coaster dips and dives of stock prices have dominated the headlines lately. But the bigger issue is this: If we are indeed entering a low-yield slow-growth global economy, how should you fine-tune your retirement planning to adapt to the anemic investment returns that may lie ahead?

We’re talking about a significant adjustment. For example, Vanguard’s most recent economic and investing outlook projects that U.S. stocks will gain an annualized 7% or so over the next 10 years, while bonds will average about 2.5%. That’s a long way from the long-term average of 10% or so for stocks and roughly 5% for bonds.

Granted, projections aren’t certainties. And returns in some years will beat the average. But it still makes sense to bring your retirement planning in line with the new realities we may face. Below are four ways to do just that.

1. Resist the impulse to load up on stocks. This may not be much of a challenge now because the market’s been so scary lately. But once stocks settle down, a larger equity stake may seem like a plausible way to boost the size of your nest egg or the retirement income it throws off, especially if more stable alternatives like bonds and CDs continue to pay paltry yields.

That would be a mistake. Although stock returns are expected to be lower, they’ll still come with gut-wrenching volatility. So you don’t want to ratchet up your stock allocation, only to end up selling in a panic during a financial-crisis-style meltdown. Nor do you want to lard your portfolio with arcane investments that may offer the prospect of outsize returns but come with latent pitfalls.

Fact is, aside from taking more risk, there’s really not much you can do to pump up gains, especially in a slow-growth environment. Trying to do so can cause more harm than good. The right move: Set a mix of stocks and bonds that’s in synch with your risk tolerance and that’s reasonable given how long you intend to keep your money invested and, except for periodic rebalancing, stick to it.

2. Get creative about saving. Saving has always been key to building a nest egg. But it’s even more crucial in a low-return world where you can’t count as much on compounding returns to snowball your retirement account balances. So whether it’s increasing the percentage of salary you devote to your 401(k), contributing to a traditional or Roth IRA in addition to your company’s plan, signing up for a mutual fund’s automatic investing plan or setting up a commitment device to force yourself to save more, it’s crucial that you find ways to save as much as you can.

The payoff can be substantial. A 35-year-old who earns $50,000 a year, gets 2% annual raises and contributes 10% of salary to a 401(k) that earns 6% a year would have about $505,000 at 65. Increase that savings rate to 12%, and the age-65 balance grows to roughly $606,000. Up the savings rate to 15%—the level generally recommended by retirement experts—and the balance swells to $757,000.

3. Carefully monitor retirement spending. In more generous investment environments, many retirees relied on the 4% rule to fund their spending needs—that is, they withdrew 4% of their nest egg’s value the first year of retirement and increased that draw by inflation each year to maintain purchasing power. Following that regimen provided reasonable assurance that one’s savings would last at least 30 years. Given lower anticipated returns in the future, however, many pros warn that retirees may have to scale back that initial withdrawal to 3%—and even then there’s no guarantee of not running short.

No system is perfect. Start with too high a withdrawal rate, and you may run through your savings too soon. Too low a rate may leave you with a big stash of cash late in life, which means you might have unnecessarily stinted earlier in retirement.

A better strategy: Start with a realistic withdrawal rate—say, somewhere between 3% and 4%—and then monitor your progress every year or so by plugging your current account balances and spending into a good retirement income calculator that will estimate the probability that your money will last throughout retirement. If the chances start falling, you can cut back spending a bit. If they’re on the rise, you can loosen the purse strings. By making small adjustments periodically, you’ll be able to avoid wrenching changes in your retirement lifestyle, and avoid running out of dough too soon or ending up with more than you need late in life when you may not be able to enjoy it.

4. Put the squeeze on fees. You can’t control the returns the market delivers. But if returns are depressed in the years ahead, paying less in investment fees will at least increase the portion of those gains you pocket.

Fortunately, reducing investment costs is fairly simple. By sticking to broad index funds and ETFs, you can easily cut expenses to less than 1% a year. And without too much effort you can get fees down to 0.5% a year or less. If you prefer to have an adviser manage your portfolio, you may even be able to find one who’ll do so for about 0.5% a year or less. Over the course of a long career and retirement, such savings can dramatically improve your post-career prospects. For example, reducing annual expenses from 1.5% to 0.5% could increase your sustainable income in retirement by upwards of 40%.

Who knows, maybe the prognosticators will be wrong and the financial markets will deliver higher-than-anticipated returns. But if you adopt the four moves I’ve outlined above, you’ll do better either way.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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MONEY consumer psychology

7 Ways to Trick Yourself into Saving More Money in 2015

piggy bank in various clamps and a vice
Steve Greer—Getty Images

These simple strategies can help you squeeze more out of your budget—and end the year with a lot more cash socked away than you started with.

If your New Year’s resolutions included growing—or starting—your savings, you’re already ahead of the pack.

Only about a third of Americans recently surveyed by Fidelity made any kind of financial resolution this year; and of those who did, just over half were aiming to stash more cash.

Kudos to you for taking this important step toward financial security.

Want to make sure your good intentions aren’t derailed before the month is out? The key is taking initial actions that will make repeating good habits easier, says University of Chicago economist Richard Thaler.

“We tend to revert to our long-run tendencies,” says Thaler. “To effect real changes, you have to make some structural change in the environment.”

With that wisdom in mind, the seven life changes that follow will help you save more money this year.

1. Use Inertia to Your Advantage

Research by Thaler and others has shown that people are victims of inertia: If you aren’t used to saving money with regularity, it’s likely going to feel like such a chore to start that you’ll never bother—or, you’ll quit after one account transfer.

But when your money is already being saved automatically, inertia works in your favor, since it’ll take more effort to stop saving than to do nothing. That is why a growing number of 401(k) plans offer automatic enrollment with a default monthly contribution rate.

Still, you may need to stick a hand in the machine if you want to have financial freedom in retirement, since the default rate (often around 3% of salary) won’t get you far in your golden years. Most planners recommend saving at least 10% of income.

Even if you set up your own plan, you probably haven’t touched your contribution rate since; more than a third of participants haven’t, according to a TIAA-CREF survey.

You can benefit from another relatively new feature called “auto-escalation.” Offered by nearly half of companies, auto-escalation lets you set your savings rate to bump up annually at a date of your choosing and to an amount of your choosing.

For other savings accounts, harness your own “good” inertia by setting up automatic transfers on payday from checking to savings (if you don’t see the money, you won’t get attached to it). Better yet, ask your HR department if you can split your direct deposit to multiple accounts.

2. Keep Your Eye on One Prize

Setting up automatic savings works well if your income and expenses are predictable; but what if either or both aren’t set in stone? You can save money as you go, but you’ll be more successful if you narrow your objectives.

Research from the University of Toronto found that savers often feel overwhelmed by the number of goals they need to put away money for—a stress that can lead to failure. Thinking about multiple objectives forces people to consider tradeoffs, leaving them waffling over choices instead of taking action.

One solution? Prioritize your goals, then knock out one at a time. If you know you need to contribute $5,000 to your retirement funds this year, focus on completing that first. Once it’s done, move on to saving for that dream home.

Another strategy is to think about your goals as interconnected; participants in the Toronto study were also able to overcome their uncertainty about saving when they integrated their objectives into an umbrella goal. So, for example, if you are saving for both a car and a vacation, consider setting up a “road trip” fund.

3. Focus on the Future

A part of what keeps people from saving is that we don’t connect our future aspirations with our present selves, research shows.

One way to get around that is by running some numbers on your retirement using a calculator like T. Rowe Price’s. When participants in a study by the National Bureau of Economic Research were sent exact figures showing how retirement savings contributions translated into income in retirement, they increased their annual contributions by more than $1,000 on average.

Another easy trick? Download an app like AgingBooth, which will show you how you’ll look as a geezer. One study showed that interacting with a virtual reality image of yourself in old age can make you better at saving.

This trick can work for more than just retirement. Another study found that when savers were sent visual reminders of their savings goals, they ended up with more cash stored up. Consider leaving photos of your goal (e.g., images of your children or dream home) next to the computer where you do your online banking to cue you to put more away.

4. Ignore Raises and Bonuses

As Harvard professor Sendhil Mullainathan has said, the biggest problem with getting a bonus is it’ll likely make you want to celebrate and spend it all—plus some.

The windfall creates an “abundance shock,” which gives you a misleading sense of freedom.

The simplest solution to this problem is to pretend you never got the raise or bonus in the first place, and to instead direct that new money into savings right away. (Remember the 401(k) auto-escalation tip? Set your contribution to bump up the week you get your raise.)

The same goes for when you return an item to a store for a refund or get a transportation reimbursement check in the mail. The faster you put extra cash into savings, the faster you’ll forget about spending it.

5. Make it Contractual

Carrots and sticks work.

One study asked smokers who were trying to quit to save money in an account for six months; at the end of the period, if a urine test showed them free of nicotine, the money was theirs. If not, the cash was donated to charity.

Surprise, surprise: People who participated in the savings account were more likely to have been cigarette-free at the six-month mark than a control group.

If you’re the type who responds to disincentives, enlist a buddy who can help you enforce upon yourself some kind of punishment if you don’t live up to your savings goal (e.g., you might promise a roommate that you’ll clean the bathroom for six weeks).

Maybe you respond better to positive feedback? Simply having a supportive friend or relative to report to on a set schedule may help you achieve results, as many of those who have participated in a group weight loss program like Weight Watchers can attest. Or you might look for some (non-monetary) way to reward yourself if successful.

You can use the website Stickk.com—inspired by the aforementioned study on smokers—to set up a commitment contract that involves incentives or disincentives.

6. Keep Impulses from Undoing Your Budget

Setting aside cash is only half of the equation when it comes to saving more: It’s just as important to keep spending under control.

Most people know to shop carefully—and early—for big-ticket items like cars or airline tickets (which are cheapest 49 days before you’re due to fly). But the premium for procrastinating on smaller items can also add up: Studies show that people spend more on last-minute purchases partly because shopping becomes a defensive act, focused on avoiding disappointment vs. getting the best value.

So give yourself plenty of time to research any item you’re planning to buy. And always go shopping with a list.

When you see an item that tempts you to diverge from your list, give yourself a 24-hour cooling-off period. Ask a sales clerk to keep the item on hold. Or, put it in your online shopping cart, until the same time tomorrow (chances are, that e-tailer will send you a coupon).

Or you could try this trick that MONEY writer Brad Tuttle uses to determine whether an item is worthy of his dough: Pick a type of purchase you love—in his case, burritos—and use that as a unit of measurement. For example, if you see a $120 shirt you like, you can ask yourself, “Is this really worth 10 burritos?” Likewise, you could measure the cost of an item in terms of how many hours of work you had to put in to earn the money to pay for it.

Also, since gift-shopping procrastination undoes a lot of people’s budgets, you might think about starting a spreadsheet where you can jot down ideas for presents year-round. That way, someone’s birthday rolls around, you can shop for a specific item on price rather than spending out of desperation.

Finally, remember that “anchor” prices can bias us to be thrifty or extravagant. So when you are shopping for products that range widely in price (like clothes or cars), start by inspecting cheaper items before viewing pricier ones. That way your brain will stay “anchored” to lower prices, and view the costlier options with more scrutiny.

7. Force Yourself to Feel Guilty

Surveys show that about a third of people don’t check their credit card statements every month.

That’s a problem, and not only because vigilance is your best defense against extraneous charges or credit card fraud. Seeing your purchases enumerated can also help reign in spending by making you feel guilty—one of many reasons people avoid looking.

Another perk of staying up-to-date with your bills: It makes you more aware of paying for redundant services, like Geico and AAA car insurance or Netflix and Amazon Prime and Hulu Plus.

Keep in mind that shaving off a recurring monthly payment gives you 12x the bump in savings. So a few of these expenses could boost your annual savings by a few hundred bucks. That’s a lot of burritos.

More on resolutions:

Read next: These Types of People End Up More Successful and Make More Money

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MONEY interest rates

4 Smart Moves for Borrowers and Savers in 2015

What rising interest rates could mean to you.

Most experts expect U.S. interest rates to rise in 2015, but no one knows when and by how much.

Rate increases rarely happen with great velocity, though. The last time the Federal Reserve raised the federal funds rate, which banks use to lend money overnight, was in June 2006. It brought the rate to 5.25% — after 17 increases.

By 2008, in the midst of the financial crisis, the federal funds rate was down to zero, where it has stayed.

A jump in interest rates in 2015 could have a big financial impact, however, especially if you are looking to buy a home, have credit card debt or own bonds.

Here is what to expect:

Consumer Loans

Rates for consumer loans, which include mortgages and automobiles, are bouncing around 3.75%, a quarter percentage point above historic lows reached in May 2013. Greg McBride, chief financial analyst for Bankrate.com, expects a series of rate hikes in the year ahead.

“This is going to be a very volatile year,” says McBride.

Overall, however, the net change will probably be within one percentage point.

For a car buyer, a change from 4% to 5% would be almost imperceptible. The average auto loan is $27,000, and borrowing that much over five years would mean a difference of just $12 a month.

Home loans are another story, so plan accordingly. Over 30 years, that one percentage point difference in interest rates on a $100,000 mortgage would mean you would pay about $22,000 more, according to an example provided by Quicken.

Credit Cards

Consumers looking to roll over credit card debt to a zero percent balance transfer should act fast, because offers have never been more generous.

“We don’t expect offers to get better,” says Odysseas Papadimitriou, chief executive officer of CardHub.com, which rates credit card offers. Duration of deals is at an all-time high, at an average of 11 months, and the average balance transfer fee is only 3%.

These deals could disappear if the Fed raises rates significantly or a tanking economy causes default rates to surge, Papadimitriou adds.

Consumers tend to focus on the length of the balance transfer deal, which can be up to 24 months, but Papadimitriou says you must also consider the monthly payments, annual and transfer fees and the interest rate after the introductory period ends.

To learn how much you will save each month, use an online calculator like Cardhub’s. It will tell you, for instance, that if you have average credit card debt of $7,000 and are paying the average rate of 14%, you would save enough to pay off your debt two months faster if you transferred it to a zero-percent card with no fee.

Most bank’s websites also provide some suggestions. For example, the Citizens Bank Platinum MasterCard offers a zero-percent balance transfer for 15 months with no balance transfer or annual fees.

Savings Rates

If you are a saver looking for higher yields, life is not about to get rosier in 2015.

“Rates are brutal,” says Morgan Quinn, feature writer for GoBankingRates.com. The yield on the typical savings account is less than 1%.

Good news in this category amounts to rates tipping over 1% on some CDs and savings accounts with high balances.

Interest rates on savings accounts probably will not head toward 3% until 2020, according to GoBankingRates latest report.

In the meantime, the highest rate Quinn was able to find was 1.4% at EverBank for “yield-pledge” checking with a $1,500 minimum opening deposit and an ongoing balance of between $50,000 and $100,000.

Bonds

The benchmark 10-year U.S. Treasury yield fell to 1.89% on Monday, its lowest since May 2013.

If interest rates go up, “it will be a tough year for bond investors,” Bankrate’s McBride says.

You can mitigate this risk with individual bonds by simply holding them to maturity, he says. But if you invest in bond funds, either directly or through target-date or managed funds in your retirement accounts, the value will probably decline.

That is not all bad news if you just stay the course. McBride’s advice: “Buckle your seat belt and hold on.”

MONEY consumer psychology

7 Reasons to Pretend You Make Less Money

Trick your brain and your wallet will follow.

We all know you can get in financial trouble by pretending to have more money than you actually do — and most of us know that you can’t make an educated guess at someone’s salary by checking out the car they drive. So you can appear to be wealthy even if you’re not. But can you get ahead by telling yourself (and intimating to others) that your paycheck is smaller than it actually is? There are some pretty compelling reasons to do it, and you could find yourself in a far better position than if your paycheck just barely covers expenses.

Here are some reasons to consider pretending your paycheck is just a bit smaller than it really is.

1. Sock Away Money in an Emergency Fund

If you don’t have an emergency fund (or even if you do), you can pretty much count on having an emergency. Car transmissions break, you need to travel unexpectedly or someone in your family ends up needing help. Experts recommend six to 12 months’ worth of expenses in your emergency fund. If you don’t yet have that, you may want to make sure you have access to credit. (You can check your free credit report summary on Credit.com to get an idea of how you would be judged by potential lenders.) But having the money saved is a better alternative.

2. Pay Down Debt Faster

If you pretend you make, say, 10% less than you actually do, you can probably cut expenses to accommodate the reduced pay. But the money you will save isn’t pretend — and you can send it to your creditors, reducing or eliminating debt much more quickly. This little fib helps keep your spending in check, which will free you to direct the money someplace else, making some other dream a reality more quickly. You can even figure out a timeline for getting out of credit card debt with this nifty calculator.

3. Save for a Down Payment or Your Kid’s College

Whether you’re looking to buy a house, educate a child or take a trip around the world, your dream is likely to require a significant chunk of change. And one way to get that is to pretend that earmarked money does not even exist. You can have it transferred into a designated account the same day you get paid so that you are not tempted to use it for the heavily discounted camping equipment that you know about because the advertisement for it popped up in your inbox. (Another money-saving hint: Most of us will spend less if we unsubscribe.)

4. Put More Money in Retirement Savings

Retirement seems a long way off when you are in your 20s, and it is. But most people’s expenses grow with time (particularly if you choose to raise children). It is not going to suddenly become easier to save more, at least not until you have far less time to do it, and the money has less time to grow. How many people have you heard complaining that they wished they hadn’t saved so much for retirement?

5. Friends Won’t Pressure You to Splurge

We’re not suggesting you do away with little luxuries altogether. You and a friend want to go get manicures? Go for it (sometimes). But think about whether all of your get-togethers need to involve a meal out, shopping or manicures. Maybe they made a resolution to move more. Walks can do double duty to help get your body and finances in better shape. And if your friends know you are on a beer budget, chances are they won’t assume you have a champagne salary.

6. Friends & Family Won’t Consider You a Human ATM

Do you often or always pick up the tab for groups because you can afford it? If you say, “my treat” too often, it’s possible you’re sending a signal that because you have more, you have an obligation to share it with your friends and family. You may feel that way as well, and if you do, you would be especially wise to pretend you have a little less money than you actually do. If you do choose to give or lend money to friends and relatives, make sure everyone is clear on what is a gift and what is a loan. Money misunderstandings have the potential to damage relationships.

7. Your Income Could Drop

It’s easy — and tempting — to think your salary will be on an upward trajectory from your first day of work until your last. (Don’t the retirement calculators assume that?) And who plans for a furlough or the loss of a big client? During hard times, it’s not unheard-of for companies to levy across-the-board salary cuts. And if you’re acting as if you make every dime that you actually do, it will be harder to adjust than if you’ve been acting as if you made less.

More from Credit.com

This article originally appeared on Credit.com.

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