My husband and I have been pretty lucky when it comes to opportunities to save money -- but we haven't always taken advantage of them.
My husband has always had a job that offered a 401(k) plan, and we've always struggled to contribute the maximum amount ($13,000 in 2004, with an additional $3,000 "catch-up" contribution for those over age 50) allowed by law. We also both fully fund Individual Retirement Accounts each year (the maximum amount is $3,000 in 2004, with an additional $3,000 "catch-up" contribution for those over 50).
But we haven't funded a separate retirement plan for me. Because I'm a self-employed, independent contractor, I have the option to contribute to a savings plan such as a Keogh or a SEP-IRA. But I've never done it. It seems there's always something else in my life that's screaming for more money.
And that seems to be the problem for a majority of American families, according to a study released in May 2002 by the Consumer Federation of America. The study found that despite the strong economic boom of the past decade, many families are having trouble saving and still live from paycheck to paycheck.
Strapped and Struggling
The study found that 25 percent of U.S. families had assets of less than $10,000 -- including retirement savings, but excluding home equity. The typical low-income family (annual income under $25,000) and moderate-income family (annual income between $25,000 and $50,000) had savings of less than $1,000.
Families with assets of less than $10,000 had pretty heavy debt, at an average of $15,528. Of these, 22 percent say they spend more than they earn, and 41 percent say they don't save at all.
Build Wealth One Penny at a Time
So, what can you do? You can build wealth one penny at a time. Sometimes the process is slow, sometimes it's painful, but you'll agree it's worth it when you see those accounts growing. The main thing you need is discipline, and fortunately, there are many programs that you can set up to siphon money out of your paycheck and into some sort of savings account. (Just ask my sister, who spends any money that gets into her pocket -- the following savings plans are the only way she was able to find the discipline to save.)
1. Set Up an Automatic Savings Plan These plans automatically take money out of your paycheck or your bank account before you have the opportunity to spend it. You can arrange with a mutual fund or other financial services company to withdraw a set amount from your checking account each week or each month, to be invested in the vehicle of your choice. Think of all the cash you spend without knowing where it goes! Could you spare $10 a week? That would add up to $520 a year. How about $25 a week? That would balloon to $1,300 in 12 months.
Would you miss that money? Maybe. But that's the way I save for my IRA, and it makes the job much easier. I have my mutual fund company take out $166 per month from my checking account, depositing it directly into my IRA. Sure, I could find plenty of places to spend that money. But by never really getting my hands on it, or having to write and mail a check to the fund company, my retirement savings is on autopilot. In fact, in an earlier report, 57 percent of those surveyed by Consumer Federation of America said saving a fixed amount each month would help them, and 50 percent said automatic deductions or payroll deductions would solve their savings problems. You could do the same.
2. Take Advantage of 401(k) Plans In the survey mentioned above, 64 percent said an employer-sponsored plan would help them save. These plans could help anyone. Like automatic deductions, the contribution you make to your 401(k) plan is taken out of your check before you can spend it. And, because 401(k) contributions are pre-tax, your total taxable income will be less each year, and that could put you in a lower tax bracket. Then come April 15th, you can sock away that refund check.
3. Live Beneath Your Means My husband and I used this strategy when I was pregnant with our daughter. We wanted to see if it was economically feasible to live on just my husband's salary, so I could quit and stay at home to care for our child. For three months, we banked my salary entirely and lived only on his. It hurt a lot the first month, a little less the next, and by the end of the third month, we decided we could do it. I quit my job and was able to stay at home. Now my daughter is 2 1/2 years old. I'm still at home, but now I work at home, too (writing these columns -- mostly at night -- after she's asleep, of course).
You could try a similar strategy, even if you don't have plans to quit your job. Instead of spending all the money you earn, resolve to bank a set amount each week and see how you do. You may have to give up some things, but as I realized, there's a lot I was able to live without. I didn't need to feed my $5 a day take-out breakfast habit, and bringing lunch from home was easy to get used to. Other ways to cut back and find savings include eating fewer dinners out, returning movie rentals on time so you don't pay late fees, and shopping in bulk at a membership warehouse club, such as Costco.
4. Slash Your High-Interest Debt Another place you can find some savings is by reducing your debt, or at least by lowering the interest rates you pay on your credit cards. If you have a $3,000 balance on a card with a 20 percent annual interest rate, you're paying $665 in interest if it takes you two years to pay it off; $1,382 if it takes four years, and $3,035 if it takes eight years. It's even worse if you only pay the minimum payment of 2.5 percent of your balance ($75); it will take you a whopping 308 months, or more than 25 years, to pay that debt, costing you $5,464 in interest. Couldn't that money better serve you elsewhere?
Instead, search for a better credit card deal. Visit Bankrate.com; they have suggestions for how to find a better deal. And if you're trying any of the automatic savings plans talked about in this article, consider sending the money you save as extra payments to your credit card. The interest you'll save is like money in the bank.
I Will Save More
I know I offer a lot of advice in this column. I want you to know that I'm not preaching here. I plan to take my own advice.
When I hear from my accountant about my taxes in the next few weeks, I plan to talk to him about setting up some kind of self-employment retirement plan. We'll talk about which one is best for my personal situation and then, my husband and I will figure out how much we can contribute -- and we will push the envelope to see how much we can live without.
I'll let you know what happens.
Karin Price Mueller is the author of Online Money Management (Microsoft Press, 2001).