Look for spending leaks. Like a plumber searching for the source of a high water bill, examine your spending habits carefully to identify significant but unrecognized expenditures that may be leaking from your cash flow stream. This is best accomplished by preparing a rudimentary budget, and then carefully tracking each expense incurred over a one-month period. At the end of the month, you are likely to discover some categories of spending that you underestimated or that escaped your notice. Then re-budget to include a specific savings goal.
Maximize participation in your employer’s plan. This seems obvious, but surprisingly few of us take full advantage of any 401(k) or 403(b) plan that may be available. This is the first place to set aside money for retirement, as employee contributions are usually tax-deferred, meaning that you don’t pay income tax on the earnings you inject until you begin withdrawing in retirement. For 2018, the maximum amount you may contribute is $18,500 plus an extra $6,000 “catch up” contribution if you are 50 or older.
Many employers offer a limited matching contribution up to a specified limit. If your company does, at least try to contribute enough to receive the maximum matching funds available in your plan. Hint: free money.
Make your emergency fund work for you. Establishing a separate pool of cash to cover unexpected emergencies is important. Consider stashing that cash in a Roth IRA account. You can fund up to $5,500 per year ($6,500 if you’re 50 and subject to certain income limits), which can be invested in virtually any security or fund. Should you need access, you may withdraw principal contributions regardless of age and without penalty, while any earnings from the account grow tax-free and are available for withdrawal after 5 years and attainment of age 59 1/2.
Automate the process. Try to make saving routine, requiring as little effort as possible. Set up a regular, periodic transfer from your paycheck or bank account into one of your savings vehicles. Your 401(k) is structured this way, so consider implementing a similar plan for your emergency fund. Many employers offer the ability to direct a percentage of salary into a Roth account or into a separate bank or credit union account. If unable to auto fund directly from your paycheck, set up a regular systematic transfer from your bank account into your savings or investment accounts. You will be amazed at how the balance grows over time when it’s on autopilot.
Likewise, you might consider an automated investment program. This can be accomplished at most brokerage firms by designating an equal periodic transfer into an index mutual fund or ETF (a technique called dollar cost averaging). Alternatively, there are companies that allow direct, systematic monthly investments in their stock and provide for automatic reinvestment of dividends (called “DRIP” plans). An interesting resource is DripInvesting.org.
The hardest step to take is usually the first one. If you are already saving, review your status and look for ways to step it up. If you have not yet begun, identify one action to take and get started this week. Creating a budget and examining your current spending is an excellent beginning point. But whatever you do, do something. You won’t regret it.
