Are you maxing out your IRA contributions? You have every intention to do right by your savings plan, but between the mortgage payments, daycare costs and a new set of tires for your car, there’s little leftover for your retirement savings. Or so it would seem. Don’t worry! There are still plenty of ways to find enough money in your monthly budget to maximize your IRA. In 2018, individuals can contribute up to $5,500 per year or up to $6,500 if they are 50 years old or older.
Far too many savers overlook pots of gold that can be used to fund their future. This article will give you five ways to find extra money to stash away for retirement by being smarter and more creative with your finances. Let’s get started.
No one likes the “B” word. It can be offensive and make people feel restricted, but it has to be said. BUDGET! Creating a budget is necessary. While your efforts to create and maintain a budget are commendable, there is probably nothing that is actually holding you accountable to that budget. There is no reward if you succeed, nor repercussions if you don’t. Time to try the envelope budgeting system.
The envelope budgeting system is very tangible. You use cold hard cash to control your spending and when you run out, you stop spending. Here is the process for how it works:
- Step 1 – Determine Discretionary Income: Look at how much you have available after you pay your fixed expenses.
- Step 2 – Decide and Divide: Look at the different spending categories on your bank statements and decide how extra money will be divided. Some common categories include (groceries, entertainment, eating out, clothing, gas, fun money).
- Step 3 – Create Envelopes: Get an envelope for each category and write the category name on the front. Then, after each paycheck, put in the budgeted amount of cash.
- Step 4 – Spend Cash Only: Once the envelope is empty, you have met your budget for that pay period and are unable to spend any more in that category until the next pay period.
- Step 5 – Save Extra Money: At the end of the month, use the money leftover in your envelopes to make a contribution and maximize your IRA.
This strategy may seem silly and tedious, but it works! It is impossible to overspend and it will provide a disciplined approach to spending. After a few months you will end up with excess in your envelopes and be able to make consistent contributions.
Eat your own food
Going out to eat is fun, convenient and delicious. But, have you ever calculated how much you actually spend on eating lunch outside the office each day? The number is astonishing! Here is a quick example. On average a sandwich, chips and a soda cost roughly $8 per day for lunch. That comes out to about $40 per work week and $2,080 per year. That money would allow you to meet one-third of the maximum IRA funding limit.
However, let’s be real. It is unrealistic to think that there won’t be opportunities, invitations or times when your prepacked lunch just doesn’t hit the spot. Going to grab lunch once or twice a week is reasonable. Planning ahead and packing your own lunch three days a week would free up approximately $1,200 that can be directed to your IRA. This same philosophy can be applied to any discretionary purchases such as coffee, soda and afternoon snacks. Planning ahead a few days a week can add up to BIG savings.
Negotiate your way to savings
Competition for consumer services should cause you to see dollar signs. Cable, cell phone, satellite radio and gyms would rather retain their customers at a lower price then allow them to walk out the door and hop in bed with the competition. These service companies are notorious for overselling customers and locking them into long term contracts with a huge fees if you decide to cancel. Negotiating is allowed, highly recommend and a successful strategy to saving a few extra Benjamins each year. Put these three fool proof tips to work.
- Step 1: Use a competitor’s flyer to negotiate prices. For example: Call your cable company and ask them, “I am thinking about switching to (competitor name). What can you do to match this price?” Then be silent! Put the ball in their court. More often than not, they will begin to lower your price, matching the discounted offer. If this doesn’t prove successful move on to step two.
- Step 2: Be persistent! Ask to speak with someone in the retention/cancellation department. These people can really make you a deal. The phone operator that you spoke with earlier may have not been given the training or permission to discount rates. Most people quit negotiating after speaking with only one person. Tell them that you need a lower rate and are considering canceling and going to another service if they cannot lower your bill.
- Step 3: If talking to someone in the retention department still doesn’t work, here is another option. This one can be hard to do, especially if you LOVE the overpriced service you are paying for each month. You must be willing to cancel. They always call back within the week to offer a better incentive to come back to them.
Save pocket change
Think about all that spare change we lose everywhere: in our cars, couches, purses and desk drawers. If you aren’t losing it then perhaps you are carelessly telling the gas station cashier to keep the change. What if you directed that extra change toward your investment account? Wait, you can! Tossing spare change in a jar might seem like an old-fashion approach to saving, but you would be surprised how quickly your nickels, dimes and quarters can add up. Every six months empty the jar and make an IRA contribution in the amount of your savings.
Not too jazzed about old school savings strategies? There are more sophisticated approaches. Over the past few years, a number of apps have popped up that do the saving for you. These digital piggy banks each offer a different twist on the same basic concept: collecting small amounts of money that add up over time. For example, Acorns is an app that rounds up every purchase to the nearest dollar. It then directs this spare change toward an investment account. It doesn’t get any easier than that!
Invest your tax refund
As the tax filing deadline approaches many people have already pre-spent their expected tax refund. Tax refunds are an obvious source of extra cash and because it is money you’ve already paid out, it won’t be missed when you redirect those dollars to your nest egg. For those who have trouble paying themselves first, tax refunds can be an effective form of forced savings. Stop pre-spending and start pre-saving!
Keep in mind, savers have until the tax filing deadline to make a previous year IRA contribution. This year the tax filing deadline is April 17, 2018. If you haven’t maxed out your 2017 IRA contributions, any extra funds that you intend to invest prior to this date should be allocated toward your 2017 contribution amount.
Make it a habit
You’ve probably heard the phrase “pay yourself first.” One great thing about technology is that it makes saving each month a breeze. Instead of having to make contributions to an IRA manually, you can set up automatic contributions based on your budget and preferences. Automated contributions makes saving an effortless task. Start small with an amount such as $25 or $50 per month. This should be easily attainable if you heed to the advice offered above and eat your own food. When your income increases due to a raise or bonus, increase the dollar figure being saved. This is a painless yet effective way to make saving a habit.
Additionally, by contributing to your IRA on a monthly basis, you are also dollar cost averaging. This means that you are buying more shares of an investment when the price is lower, and less shares when the price is higher.
Now you may be thinking these tips are great, but do I invest in a Traditional IRA or a Roth IRA? Both are effective tools to sock away money for retirement; however there are slight differences in the account types and rules regarding contributions. Please consult with your tax professional or financial advisor to discuss whether which type of account is most appropriate for you. The most important this is that you are reworking your budget to find creative ways to begin saving more. After a couple weeks you won’t miss your daily coffee or the premium cable package.
Meet the Author
Senior Financial Planner, Wealth Manager
Kayla Cook, CFP®
Kayla joined the firm in 2014. She has many years of experience working in the areas of personal finance, financial planning, and investments. Kayla is responsible for analyzing a client’s financial information and determining the best approach for meeting their objectives. In addition, Kayla provides strategic wealth management for individuals, families, and organizations. She is…
- CERTIFIED FINANCIAL PLANNER™
- Series 7 and Series 63 security exams
- Personal finance, financial planning and investments
- High-net worth individuals