It's that time of year! The time when we often commit to improving our physical health and wellness, but what about your financial health? Most of us get a steady paycheck twice a month or every two weeks. We learn to live on that and many of us create a budget that allocates our pay pretty completely leaving little for extra savings. Saving additional money for a rainy day account, home improvements, vacations or a 529 college saving plan can be difficult. However, by just making a few small changes you can jump start your short and long term savings and create some smart fiscal habits.
START SMALL IT ADDS UP
For 2019 make a New Years resolution you can keep. Save a small amount out of each check. Lock it away in a savings account and forget about it. Start with $50 a check and transfer it to your savings account. Most banks will set up an automatic transfer or consider starting with a new savings account with a separate online bank so you are not tempted to touch it. Don’t invest it in the stock market, this is a short term savings account so even less than 1% return is ok. Stick with it, have your spouse do it. Double it after a few weeks. Double it again in January 2020. Call it your holiday fund or vacation fund. Over time it will add up. A husband and wife each saving $100 a check adds up to $5,000 by year end. Use that for some fun and you will not be spending January – March paying off the holidays from the year before.
OVERSAVE FOR YOUR 401K OR RETIREMENT PLAN
The 2019 401(k) contribution limit is $19,000 ($25,000 if you are over 50). For the SIMPLE IRA plans it is $13,000 ($16,000 over 50). Many people set up the maximum savings to be spread over their 24/26 paychecks during the year. Instead, set up your recurring contribution so that you max it out before year end. If you set it up to hit the mark by the end of June or even October your NET pay will dramatically jump once the max is reached. Save that “bonus”.
SAVE YOUR EXCESS SOCIAL SECUIRTY CONRIBUTIONS
For 2019 the social security limit is $132,900. Once your social security wages exceed that your employer stops withholding 6.2% of your wages for social security taxes and you typically see a bump in your NET pay. Don’t waste that bump! Once you hit the wage limit take that increased NET “bonus” and save it.
SPEND YOUR RAISE ON RETIREMENT
Did you get an increase in pay? Before you increase your standard of living and spend that higher net check contact the human resource department and increase your retirement savings. For instance, if you received an 8% raise put 2 – 4% into your retirement plan. You will not feel the hit and will still see an increase in your NET pay so you can treat yourself to an extra weekly dinner out. If you are already maxing out your retirement contribution increase your personal savings or your child's 529 college savings.
SELF EMPLOYED? INVEST IN YOUR RETIREMENT ACCOUNTS YEAR ROUND
Many self-employed individuals contribute to their IRA or retirement plan AFTER the year has ended because it can reduce the tax hit and helps with your business cash flows. For others though it may be because you are unsure of the maximum you can contribute and have to wait for your CPA to complete your taxes. Many business owners can contribute some of this during the year so why not get your money working for you sooner? If you put away $12,000 in a SEP last year then consider putting away some of the 2019 contributions NOW. Send in a set amount each month and true up with your CPA in the spring to calculate the maximum at that time. Investing consistently over time evens out some of the market risk and the additional returns by getting the money invested earlier can really add up.