This process begins by thinking about your savings from a monthly, versus annual, perspective. Breaking things down, and quantifying numbers monthly, is much easier to understand and act upon than targeting an annual savings goal. Aligning what you elect to save, in the same frequency as you are paid, allows for you to take 12 small steps a year as opposed to one big step over 12 months.
The best way to save more money now is to utilize automation tools. Studies have shown that automatic 401k enrollment for new employees has a positive impact in creating new investing habits. More is saved when employees are automatically enrolled into the plan versus asking them to enroll themselves. When employees preferences are defaulted to an increasing contribution schedule (based on a pay raise or annual review) they end up saving more. What about money needed before retirement? College education costs, home renovation, big ticket purchase, cash reserves, all of these may (and should) be funded via automation. It starts with calling a “financial time out” and reviewing what you are saving and investing. Here are some ideas that may help you:
- Check your year-to-date contributions on your 401k or Thrift savings plan. Participants under the age of 50 may contribute $19,500 per year. If you are spreading contributions evenly across your pay cycles, then you should be on track to have $9,750 +/- in employee contributions in your account so far this year. You employer match doesn’t count toward your employee contribution limit.
- A word on employer matching: It’s nice to have a company match when you contribute to your retirement account. These contributions can possibly change or go away, so it’s best to view them as “bonus” money. Stay focused on your own contributions and increase them whenever possible.
- Are you turning 50 this year? You don’t need to wait to hit 50 before taking advantage of the $6,500 in catch-up contributions. In the year you turn 50, you’re able to maximize your total retirement contributions in the amount of $26,000 per year (in 2020).
- When was the last time you increased the automated contribution to your child or grandchild’s 529 account? Is it possible that you could increase that now?
- How much is being directed to your after-tax investment account? Have monthly contributions been increased recently? Contributing monthly, at various price points, is one of the key metrics in becoming a successful investor. More on that here.
- How are your cash reserve levels now? We’ve discussed funding cash first, as part of your planning process. Creating an automated bank transfer to fund a vacation, or other short-term needs, helps you accumulate more without having to think about a manual transfer. Spoiler alert! It’s possible, and very likely, that a large balance left in your checking account may evaporate. Unassigned money in an operational checking account tends to get spent over time.
There are a lot of formulas floating around, both in print and on websites, that say you should save or invest X percentage of your income. These blanket statements are nice but rarely assist professionals and families with their unique goals and priorities. Everyone values a dollar differently and each may be at a different stage in their life. It’s better to outline your priorities first, including short term cash needs, before judging yourself against a broad metric that may have little to do with what’s important to you. It may be possible to save and invest more, don’t be held back by generalized “rules of thumb”.
Got debt? Anything you apply, above and beyond your current minimum payment, counts as savings from my perspective. Debt is just too easy to get into and takes longer than you anticipate to pay-off. By applying more to your minimum payment, you are shortening the duration and interest on that debt. The best opportunities appear once your debt is paid off. Immediately applying “this payment” to another priority is paramount, don’t let this opportunity slip by. Capture the money you were already spending and move it to another job descriptions that supports your plan.
So, what does this all mean? Life moves quickly and if you haven’t checked your savings and investment levels since late last year, now is the time to do so. By increasing your savings and investments, you are, by default, living on less. Automation is the key to making this a reality and feeling good about your forward progress. Want to feel better? Reach out and let us know how we may assist you. We are a great accountability partner.
Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Flowerstone Financial are not affiliated.