Saving for Emergencies and Retirement
While growing up, if I had a nickel for every time I heard my family tell me “money burns a hole in your pocket“, well, I still wouldn’t have any money because I spent it all!
My idea of saving when I was young, and even through college, was to not cash out the savings bonds my grandmama bought for me each birthday and Christmas. I lived paycheck to paycheck and still have trouble stashing away cash for rainy days.
However, I’ve been making major improvements in our finances. We’ve been contributing towards my wife’s 401k since she was eligible for a match, and I just signed up to contribute to my own employer’s 401k. However, I wish I began contributions a year ago even though my employer didn’t match then. Additionally, I haven’t been contributing to our Roth IRA limits since I opened it, but I justified it as “using the money to pay off debt”. I’m changing that line of thinking, but read on for more.
So how can you start saving more money?
Again, until you create a budget, you’ll have no idea how much you could be saving. Once you know how much you’re earning and spending, then you know how much you could be saving. Obviously, you need to pay your bills first, but you need to calculate the costs and benefits of paying down any extra debt you may have versus putting that money towards savings and investments.
Generally, if your debt interest rate is higher than your potential savings interest rate, then pay down the debt, but you need to consider the benefits of the different savings options available. For example, a definite return of 5% on a money market savings account is a different type of investment vehicle than an assumed return of 10% on a pre-tax Roth IRA. One can help you beat inflation while keeping your money liquid, while the other can help you stay alive through your golden years.
In our case, we didn’t know online savings accounts with high interest returns even existed until last year, and I didn’t have the discipline to save for retirement until recently. So for the last year, we’ve been paying down our low-interest debt fairly successfully, but still have a long way to go. But, now we need to decide how much to put towards savings versus our debt.
If you lack the discipline to save each month, then you have 2 options to have it done for you:
1. Ask your employer to separate your direct-deposit paycheck into your checking and savings accounts. You can either choose a percentage of your paycheck or a specific cash amount. You’ll need to resubmit your direct deposit paperwork to have the split done.
2. Set up an automated transfer from savings to checking. Our Bank of America checking and savings accounts are linked, so we can easily transfer between the two. However, BoA only offers a paltry 0.50% (or less) on their savings accounts, so we decided to fund one of our online savings accounts. I’ve found ING Direct and Emigrant Direct are pretty simple to add an account and set up scheduled transfers, and I’m actually looking into ING’s online-only Electric Orange checking account. However, we would still keep our brick-and-mortar checking account for quick ATM deposits.
You can also schedule automatic contributions to many investment accounts just as you would with an online savings account. We’ll be setting up an automated Roth IRA monthly contribution to our eTrade account as well. I don’t want to get trapped with a tax underpayment like I did last year!
Your own decision depends on your ability to force yourself to save rather than spend. For many of us, if the money is available, we’re much more prone to spend it. Take the money out of your account automatically when you get paid, and you don’t have the option or temptation to spend it.
Be sure to check out the rest of the series Fixing Your Money Mistakes: