Here at Wealthy Idiots, we’ll often be talking about how much you should be trying to save each paycheck, and while you’re reading that, you may be overwhelmed thinking about how daunting it seems. Well, there are some small tricks that can help you along the way.
Payoff debt before anything else
If you are walking around with $20,000 in credit card debt it will certainly hamper your ability to save. This doesn’t apply to all debt as it’s completely reasonable to have a car payment and mortgage in 2021. In fact, you’ll never hear me advocate for paying off a low interest rate mortgage early.
The main debt I’m talking about is credit cards and student loans. If you have existing balances on these you’ll want to tackle them prior to boosting your savings rate. Caveat to this: you should always contribute enough to your 401(k) to get the employer match. For example, if your employer matches up to 5% of your contributions on your $50,000 salary, you should be contributing at least $2,500 annually to get a FREE $2,500 from your employer. Why would you turn down free money?
Moral of the story: pay off bad debts prior to taking your retirement accounts to the moon.
Invest your pay raises
This is the easiest way to increase your retirement savings without noticing. By putting away money that you never technically had, you’ll be doing your 60 year old self a huge favor. Check out this example below.
Year 1 – $50,000 salary, contributing 5% and getting a 5% match = $5,000 total contribution
Year 2 – $5k raise for $55,000 salary, contributing 10% and 5% match = $8,250 total
Year 3 – $5k raise for $60,000 salary, contributing 15% and 5% match = $12,000 total
Year 4 – $5k raise for $65,000 salary, contributing 20% and 5% match = $16,250 total
Year 5 – $5k raise for $70,000 salary, contributing 25% and 5% match = $21,000 total
Did you see that? This isn’t an uncommon salary trajectory for someone who majors in business, engineering, accounting, finance, computer science, nursing, etc. (all the more reason to pick a high-paying sought after career field). After just 5 years, this person is nearly contributing the IRS maximum to their 401(k)! CRAZY!
What’s even better? They are bringing home $52,500 after their contributions, which is still more than when they started. From now on, when they receive raises, they’ll take home most of that money. This would allow for the opening of the best retirement account ever – the Roth IRA.
As an alternative, it’s worth noting that you could open a Roth IRA once you reach your employer match and max that out prior to boosting the 401(k). This is a matter of preference.
Bonus benefits to boosting your savings
If you think the increased retirement savings is the only benefit to this, you’re wrong! You’ll be experiencing deferred taxes. This means you won’t pay taxes on the 401(k) contributions, but rather, will pay them when you withdraw the funds in retirement at 59.5 years old. Win-win. This also helps retain eligibility for some credits that phase out after a certain adjusted gross income (AGI). These include the savers credit, child tax credit, dependent care credit, earned income credit, and I’m sure many others.
Additionally, by saving early and often, you are conditioning yourself to think that money is allocated and untouchable. This is one of the hardest parts of personal finance. How often do you hear people say that they just saved up $1,000 only to spend it the next week? We’re all human and can admit that money has a tendency to burn holes in pockets. Break this mindset early in your career!
Next steps
If you’re reading this and already making $70k and not contributing past the match, you are probably wondering what you should do, right? Well, the easiest way to increase contributions is incrementally. For instance, could you increase contributions by 1% of your salary each year? Maybe by $1,000 each year? As long as the method is consistent, and gets you to the finish line, there is no definite rule on this. BUT, you should definitely be investing your raises and even your bonuses (Roth IRA).
