For some, the word “saving” is like a curse word. It somehow means that you cannot spend your money on “fun” things now, or it somehow means that you have to give up all opportunities until you are older. It does not have to be this way. You can have fun now and in the future. All it takes is some planning and some self-control.
I suppose that if I am using words like “planning” and “self-control”, I should also throw the word “budget” out there, as well. This does not mean that you can’t be spontaneous. It will, however, help you to be more thoughtful about your approach to your financial future. And…your financial future will affect almost every other aspect of your life.
So how do you start? Well, some parents start saving for their kids at a very young age. The problem is, they don’t tell their children what they are doing, why they are doing it, and how it will help them. If your parents did not do this or were not in a position to start this for you, then simply make the decision to begin the process of setting aside money on a weekly, bi-weekly, or monthly basis. You can start with a savings account. As your financial literacy grows, you may want to venture out into other financial options, which would allow your money to work harder for you. It is never too late to start saving.
Are you an employee? Does your employer offer a 401 or 403 retirement option? Do they match contributions? Is there a profit sharing option? Take advantage of these employer contribution components. If they do match, go for the maximum. Your contributions will help out on taxes. Your pre-tax dollars will go in and not be taxed until being withdrawn at retirement.
Maybe an IRA would be a better option for you. Your contributions have limits, but they may also be deductible. There are, however, phase-out thresholds for your contributions. Don’t let these limitations deter you from using these types of financial instruments. They are helpful and will help you to reach your goals. The biggest drawback with IRA’s is when you withdraw funds before age 59 ½. There is a 10% penalty for early withdrawal. That is why having a savings account as a reserve for those unexpected situations is a great complement to the IRA. There is also a 50% penalty for failing to start taking traditional IRA withdrawals after age 70 ½.
There are also people that like to do their own investing and that is perfectly fine. If you take this route, I encourage you to do your homework. Look at various avenues for your investments. Avoid “high cost” funds. Your money may end up working to pay the fees and not growing for your future.
Your tax refund is another great opportunity for saving money. Some people have their refund money spent before they get the funds. If you think of your refund as income, you may potentially lose out on a reserve funding source. You could take your refund and put it into savings, your 401/403 account, or use it as an IRA contribution. An out-of-sight, out-of-mind approach can help to keep money from burning a hole in your pocket.
With all of this said, I realize that everyone’s situation is different and that we all do not have the same options. However, the approach here is meant to cover most people. Many of us having financial concerns for the present and the future. I think that we would all like to retire someday. That is why it is so important to take advantage of the present to make sure that we can be prepared for the future. Don’t plan on a luxurious retirement. Plan on a comfortable retirement.
-Michael Hermanson, CPA | CGMA