October 2014: How to Save When It Looks Like You Cannot
Pay yourself first
You’ve heard the expression. It simply means that you treat the “purchase” of your savings as the most important “expense” you have. One way to do this is in your employer-sponsored account. Your retirement plan contributions come out of your paycheck automatically. Putting the money in saving before you have a chance to spend it is a great way to start.
If your company offers a retirement plan that includes employer-matching contributions, find a way to contribute enough of your own money in order to maximize your employer’s contribution. Dollar for dollar, it’s the best return you’ll get.
Smooth out your cash flow
Now it becomes a little easier to find a way to manage on a monthly basis without that money because it’s not available! This is where cash flow becomes important. The goal is to find a way to spread annual or semi-annual expenses into more even monthly or quarterly payments. This will make it easier to meet those expenses without “busting” the budget.
For example: Auto and life insurance premiums can often be paid on a quarterly basis. There may be a nominal fee for the privilege, but is a better and cheaper idea than having to charge an annual expense to your credit card and then spending months to pay that amount off.
Quick hit savings ideas:
- Watch out for the latte factor If you buy coffee every day, you could be spending $80 a month! Start making your own coffee beverages or limit yourself to one drink per week.
- Extend your car Keeping your car just one extra year can save you hundreds of dollars by avoiding higher insurance costs, increased property taxes and interest on a loan.
- Bundle up Experts estimate you can save between 2% and 3% on heating bills for every degree you lower your thermostat in the winter.
- Rent a movie Renting once a month, versus going to a movie with popcorn and sodas, could save over $20 each month for a family of two.
- Cut back on extras Cancel premium channels and/or reduce the level of your cable service. Drop extra features on your phone service such as caller ID or call forwarding.
Manage withholding to fund retirement
Managing your employer withholding amounts is another way to increase your cash flow and provide for the gap between savings and operating expenses. Here’s how:
- If you receive a federal tax refund each year, complete a new W-4 employee payroll withholding form and increase your allowances. THEN …
- Increase your 401(k) contributions by the same amount as your refund. Be sure to take into account any annual tax-deferred contribution limits.
- Your take home pay will be the same or more, and you are funding your retirement with future tax refunds.
What about that house and college fund?
Owning a home and providing for your children’s future college expenses are two wise investments. Neither one, however, should be allowed to displace your regular retirement savings program.
Remember, a paid-off home may give you a place to live in retirement, but it will not provide you a paycheck. There are many affordable ways for you and your child to finance educational expenses when the time comes.
As you become better at saving, you will find yourself keeping an eye out for more ways to increase convenience and cash flow. It will become easier to balance competing priorities. And your knowledge and appreciation for financial concepts will reward you throughout your life.
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