As a family, we've 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 allowed by law. We also both fully fund Individual Retirement Accounts each year.
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, many of whom are having trouble saving and still live from paycheck to paycheck.
What can you do to stop struggling and start getting ahead?
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, 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 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 enjoy (or better yet, save) 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. The higher the interest rate and the longer it takes you to pay, the more you'll end up spending just on interest. Making minimum payments at a high interest rate can mean spending more on interest than you originally spent on items in the first place, so don't think of it as a minimal expense.
Instead, search for a better credit card 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 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).