How to Get Your Savings on Track
Whether it’s losing weight, learning a foreign language, or cleaning out an over-neglected garage, the goals we set for ourselves can sometimes be intimidating, especially so when it comes to finances. For many, the prospect of retirement saving can seem too big a task to even begin.
Setting goals doesn’t have to be a scary thing, though. When a job is too big to take on all at once, the best thing to do is to tackle it via a series of smaller steps over a long period of time. This makes the task easier to accomplish as long as you start taking steps in the right direction.
Think about the process of retirement savings. A young person starts out directing a few dollars a week into a 401(k) plan. At that rate, it doesn’t seem like the money will ever amount to much. Yet, according to the Employee Benefit Research Institute (EBRI), older, longer-tenured employees have an average of around $290,000 in their 401(k) plans.
How can you build up that kind of nest egg and go beyond to accumulate the money you’ll need for a comfortable retirement? Whether you are just starting out or are well into your career, there are probably multiple things you can do to improve your savings program.
9 Solid Steps to Start Saving for Retirement
They say a journey of a thousand miles starts with a single step. Below are nine different steps you can take toward a wealthier retirement, and in many cases, once you take these steps initially, they will continue working to build savings on your behalf for years to come.
Get your spending under control
Face it – spending and saving are natural enemies. To give saving the upper hand, you need to start by getting a handle on your budget. If you have your paycheck directly deposited, try having that money go into a savings account rather than a checking account so that not all your pay will be immediately available for spending. You can then transfer a budgeted monthly amount from savings to checking, so you will start saving what’s left over by default.
Start eliminating credit card debt
Even if your spending is under control, with credit card interest rates north of 16 percent and the average savings account rate still under 1 percent, your savings will likely go backward unless you start eliminating credit card debt. This is especially urgent now that credit card rates are rising rapidly. The average rate being charged on credit card balances has reached 16.46 percent, which is up by more than three full percentage points in the past four years. Prioritize your debt so you pay down the balances with the highest interest rates first and then work towards paying off any other remaining balances after that.
Bank at least half your next raise
Finding it difficult to carve out room in your budget for savings? Try this: the next time you get a raise, devote half of that pay to your savings account. This will allow you to easily add money to your savings account without your current lifestyle taking a hit. Get in the habit of doing this with each raise you get over the years, and steadily watch your savings ramp up.
Build a viable emergency fund
A first step as you start to save should be to accumulate an emergency fund to cover unexpected financial needs. A good target is to build up enough to cover three to six months’ worth of essential expenses. Having this reserve of money available could save you from running up expensive credit card debt when an unexpected need occurs.
Be more selective with how you bank
The more that you accumulate your savings, the more important it will be that you earn a good interest rate. Whether you open a CD, money market account, or savings account, shop around for a competitive rate. Also, look for a checking account that is free of monthly fees – free checking accounts are in the minority these days, but they do still exist.
Take full advantage of your employer’s 401(k) plan
If your employer has a 401(k) plan you have the opportunity to defer income taxes on both the money you put into it and any investment earnings on that money. If your employer offers a matching contribution, an immediate goal should be to contribute enough to earn the full match available. Otherwise, you will be walking away from money that could be yours.
Develop a career plan
The EBRI found that not only do older employees tend to have larger 401(k) balances, but within the same age groups, people with longer tenures in their jobs tend to have even larger balances.
Make use of catch-up contributions to 401(k) plans and IRAs
While it pays to start saving early, the reality is that many people find themselves late in their careers, with retirement savings lagging well behind where they should be. Fortunately, there are additional retirement savings tax breaks, known as catch-up contributions, available to people in that position. 401(k) plan participants who are aged 50 and over can contribute up to an extra $6,000 a year to their plans, while Roth or traditional IRA owners in that age group can contribute up to an extra $1,000.
