Thanks to the power of compound interest, starting saving as young as possible is the best decision for your personal finances. But there is never a time that is too late to start saving. If you are in your 40s or 50s and are behind where you want to be, follow these steps to get on track for improved savings for retirement.
Cut Your Overhead
The first place to focus when trying to save is your spending. If you live paycheck to paycheck, getting onto a budget and managing your spending is vital. Even if you live comfortably, you can always find areas to save on your monthly bills.
Using a service like Trim can help you cut your monthly subscriptions and a budgeting app like Mint can help you manage the rest of your spending and stick to a budget. “A penny saved is a penny earned” doesn’t sound as nice as “a Benjamin saved is a Benjamin earned,” and if you are not on track to meet your retirement goals, you have a lot of Benjamins to save to catch up.
What you earn minus what you save is how much you have available for savings. Now that you cut your monthly recurring spending and are keeping an eye on other expenses, we can look at the “earn” side of the equation.
If you make $20,000 per year, you will never be wealthy even if you budget and stretch every dollar as far as possible. You can only cut your spending so much, but your earning power is unlimited.
Whether you want to earn more to get out of debt, improve your savings, or just live a better lifestyle, you have the power to earn more on the side. In 2014, I earned $40,000 on the side while maintaining a full-time job. If I can do it, you can do it!
Pay Yourself First
Once your earning and spending are optimized, it’s time to look at where your money goes every month and rethink your attitude on how you pay the bills. Most people pay their monthly bills, pay for other expenses as they go, and save what’s leftover. Instead, you should fund your savings first and pay for your other expenses with what’s leftover.
This habit can revolutionize how you save. By setting your savings goals first and ensuring you reach them, you know you will have enough money for your most important needs in the future. If you don’t have enough cash leftover at the end of the month after paying yourself first, return to steps one and two and look at ways to improve your monthly cash flow.
Make Retirement Savings Automatic
If you have to go to the bank or login online every payday or at the end of each month to fund your savings, you have big obstacles in the way of reaching your goal. If you take away the work it takes to save and make it automatic, you can’t forget, get too lazy, or come up with another excuse not to save.
Here are two favorite methods to automate savings that you might not know about:
- Split your direct deposit – If you are paid by direct deposit, most employers give you the option to split your direct deposit into multiple accounts. If you are paid bi-weekly, sending $211 every payday into a Roth IRA will save you the maximum $5,500 for the year. You can send a portion of your paycheck to any bank or investment account. Check your financial institution’s website and contact your company’s HR department for more information.
- Setup a recurring transfer – Log into your bank’s website and look at the section dedicated to transfers. Most banks give you the option to setup a recurring transfer on any schedule you’d like at no charge. If you want to achieve the best results, match the transfer schedule to your direct deposit schedule so you are saving every payday without even thinking about it.
Both methods achieve the same result, and it’s up to you to decide how you want to setup your automated savings. You know yourself better than anyone else. If you think you would be tempted to spend from a linked savings account, consider saving at a different bank than where you have your checking. That makes you wait a couple of days for an online transfer to come through and will help you stop yourself from making impulse purchases from savings.
It’s Never Too Late to Invest
While you won’t have as many decades in the markets as if you had begun saving in your 20s, it is never too late to start investing. If you are in your 40s or 50s, you have at least fifteen years to save before reaching the common retirement milestone 65.
Investing in a low fee, broad market index fund is the best option for most investors. Warren Buffett once suggested putting 90% of investments into a low-cost S&P 500 fund and the remaining 10% in a short-term government bond fund. If you are brand new to investing, check out Vanguard as a popular, low fee mutual fund and ETF provider.
Most individual investors are best off avoiding purchasing stock in individual companies. It takes a lot of cash to create a diversified, well-structured portfolio. An S&P 500 index fund gives you the same portfolio as if you had bought a small share in each of the 500 companies listed in the index.
Put Your Finances on Autopilot to Maximize Your Savings
Your employer gives you direct deposit and access to a 401(k). Your bank and investment company gives you options for recurring transfers and automatic saving and investing. Take advantage to put your savings on autopilot.
Work hard to spend less, earn more, and save as much as possible. Even if you are just starting on your retirement savings now, it’s better late than never and you still have at least a decade and a half before you will need to access your retirement savings. Make savings a priority and you will be on track to reach any reasonable financial goal.