Saving is a key step toward building your wealth and securing your future. I am frequently asked by clients, friends and members of the press to provide insights on how best to start saving. While the answers can be many and varied based upon ones individual situation, here are a few tips and answers that should be useful if you are thinking about developing a savings plan or know someone who is.
1. What tips do you have? The number one priority is to save as much as you possibly can. There are two ways to do this, one by increasing income the other by cutting expenses. Most people can't take on another job given their current day job, but everyone can manage their expenses. Cut out extraneous expenses and live beneath your means. If you accustom yourself to living well without a lot of luxuries, you can save money and set yourself up to retire well and maintain some cushion for a few extravagances.
2. What are some important pitfalls to avoid? Don't get into the trap of saying, "I will do it tomorrow." For most people this is a recipe for disaster. Start saving now and even taking small steps will help. The power of compound interest is immense, but it lessens as your time horizon shortens. Even small amounts saved well in advance will have the opportunity to grow substantially and help secure your future. Warren Buffet thinks about every purchase in terms of its future value. He famously declined an expensive haircut today citing that it would cost him $300,000 in future value. We can't all live this way, but knowing that spending today will reduce your future potential wealth can help you save more.
3. What should individuals do if they are self-employed vs working for an employer? Self-employed individuals can take advantage of tax-deferred savings plans, much like their employee counterparts. Make sure to max out your IRA and Roth IRA contributions and if you are self-employed you can increase your savings limits by setting up a solo 401(k), a SEP IRA or SIMPLE IRA. Please contact your tax professional to determine if such a plan is right for you and to determine how much you can save in these tax-preferred accounts.
4. What should someone do if their employer doesn't match their retirement savings or only offers a 1% match? In every case it is usually advantageous to participate in a workplace 401(k), match or not. You are able to contribute a much higher amount ($19,500, $26,000 if over 50 in 2020) compared to a personal IRA ($6,000, $7,000 if over 50) which translates into a larger tax benefit. Assuming that your wages will be higher now than in retirement and that your taxable income will be taxed at a lower tax rate in retirement than now, contributing to a tax-favored retirement plan can make a lot of sense. Also, think about setting up retirement accounts for your kids subject to their earned income for the year.
5. What are some creative avenues to save more effectively for retirement? Set up automatic savings triggers, such as removing a set amount from your checking account monthly to invest for retirement. Increase your 401k contribution by the amount any raises you receive or set aside a significant percentage of any bonuses you receive to pay down debt and invest for retirement. Set aside a "retirement jar" where you deposit every $5 or $10 bill or change that comes into the house. You'll be surprised how quickly you can accumulate significant dollars toward your retirement goal with a little bit of planning and foresight.
As always, make sure you speak with your CPA or EA when dealing with tax matters and seek out the advice of your financial planner or advisor to help you save and invest wisely.