Put Savings On Autopilot and How I Saved $250,000

I want to share with you how I saved my first $250,000. Of course, your result will vary depending on your income, saving options, and ability to save.

Automatic-Investment Plan (AIP)

I started working in 1996 as a contract worker, so I didn’t have any 401k plan. Personally, I am not a budgeting type, so I had to somehow find a way to “pay myself first.” The only option available to me then was Automatic-Investment Plan through my discount brokerage, Charles Schwab (I have since moved to lower cost discount brokerage firm). The plan basically withdraws an amount of money from my Money Market account and buys shares of mutual funds I own. It was flexible enough for me to specify exactly how many dollars I want to spend on each fund and how often.

401k

401k is probably the best automatic investment plan available. When I was hired full-time in 1998, I was able to participate in the 401k program. With 401k, I was able to contribute with my pre-tax money before I even get the paycheck. There are several distinct advantages with 401k:

• Invest with pre-tax dollars - this allow me to pay less tax
• No tax on yearly distributions and dividends
• Get company match - this is not a huge amount, but it is instant return on investment!
• Easy to reallocate my portfolio
• Automatic dollar cost averaging

Payroll Deduction

In 1998, I bought my first house and later in 2002 refinanced it to 15 years through my company’s Credit Union. In order to save money for mortgage payment, I set up a payroll deduction to deposit a portion of my paycheck into the Credit Union account which automatically pays the mortgage each month.

If your company offers this option, this is a good way to pay yourself first and use it for investing purpose as well. Direct deposit can also be used, but it typically does not offer the ability to split up your paycheck into several accounts; therefore, you need some discipline to divert a portion of your money for investing.

Other Methods

Aside from these three primary methods, here are some additional ideas:

• Automatic reinvestment – For all my investments, I instruct the brokerage firm to reinvest all dividend payments and yearly distributions. This way my investments can take advantage of compounded growth.
• Credit card reward – This is not recommended if you have problem with debt. I always pay my credit cards in full each month. I have 2 credit cards that I primarily use, and both offers cash back reward. I make most of my purchases using these cards. Once I collect enough reward money, I deposit it into my investment account.
• Tax Withholding — personally, I do not over-withhold because I think it is silly to give the government tax free loan. However, for those of us who have hard time saving money and do not have other choices. Over-withholding can be an option, as long as you DO deposit the refund into a saving account.

It took me almost 10 years to save my first $250,000, and it was not easy. I lived well below my means and maxed out my 401k and IRA every year. I also learned my investment lessons early so my losses were limited. Saving money and being frugal, along with a good investment strategy, allowed me to reach this point.