When it comes to contributing to a retirement account, many people do not really know what to do. In this post, we will examine some techniques for saving long-term for retirement and other pertinent issues. What is important is for everyone to realize that it is vital that you save as much as you can as early as you can in your savings accounts. This will allow the extraordinary power of compounding to work in your favor. But before we get into the saving aspect, I must first mention that before you start any financial endeavors, you must first budget to see where your money comes from and where it is going. If you need any assistance, to seek the help of a Registered Financial Consultant (RFC).
Contribute to Your Company’s Match
If you work for a company that has a company match in your 401(k) plan, you must never leave free money on the table. This is an excellent way for you to amass a substantial sum of money in your account that basically has an instant return. Take the government as an example where they will match the first three percent at 100% and percent’s four and five at 50 percent. So, if you save up to the five percent match, you are saving nine percent with the company match. Free money! So, if you make $100,000 and save up to the match, you contribute $5,000, and your company matches it with an additional $4,000. In 2019 the contribution limit is $19,000, and for those over 50, there is a catch-up contribution of $6,000 allowed.
Know Your Financial Priorities
Yes, contributing to your 401(k) is extremely important, especially up to the match. It is not all you need to worry about when it comes to saving. People save for automobiles, homes, and a child’s college. This where the budget will come in extremely handy and will provide guidance to your actions. And most of us have some if not many forms of debt that we must also pay. It is a never-ending process; it seems but does not despair. There is always hope!
Emergency Funds
Another area of saving that is vital to long-term financial health is to establish an emergency fund or three to six months of expenses saved just for emergencies. These funds are not to be invested in making a profit but rather are to be kept liquid for easy access. For people who have steady and secure jobs, you can get away with saving three months, but for those whose jobs are bot stable, you would want to save closer to the six-month amount. But regardless, you need to have several thousand saved for emergencies to avoid getting into the next topic in the event you have something that you have to pay for.
High-Interest Debts
Too many of us have some high-interest debt that we are paying on, and it is harming our financial future. Credit cards are the main source of this debt, and it seems people get caught on a revolving door when it comes to these instruments. Most credit cards charge anywhere from 15% for those with excellent credit to north of 25% for those with poor credit histories. And if you are saving and earning 10% in the stock market yet paying 25% to your credit card company you will not get ahead financially. But that does not mean I am telling you not to save because I do not know your specific situation. But regardless, I do think that could be difficult to pass up free money in a 401(k) but saving the full emergency fund may have to wait. But as I alluded to, you need at least a few thousand save for emergencies to avoid having your credit card debt grow if something were to happen that is not a major emergency.
Individual Retirement Accounts
If you have poor choices in your 401(k) and have paid off your high-interest debts, you can save for your emergency fund and save in an Individual Retirement Account (IRA). In 2019 people under the age of 50 can save up to $6,000 if they have earned income, and for those over 50, they have an extra $1,000 that they can save. And depending on how much you make in a year you can either have a Traditional IRA where you are given tax deductions in the year you make the contribution and then pay taxes on all your withdrawals. Or if you qualify, you can invest in a ROTH IRA where you pay the taxes on the contributions now, and all withdrawals are tax-free. And as a bonus with a ROTH IRA, all your contributions can be withdrawn without penalty as the taxes have been paid already in the event you need to dip into the account as a form of savings.
It is vital that you start saving for a wide variety of things as early as you are able and to avoid the accumulation of credit card debt. That was compounding will work in your favor and not against you as you go through life. When it comes to 401(k) accounts always save up to the point where your company will match. Establish an emergency fund with a minimum of a few thousand dollars while you pay off any high-interest debts. Then use IRA’s as an additional savings tool to reach your goals.
If you need any assistance, reach out to me or any Registered Financial Consultant and as always feel free to contact me directly. To join our email newsletter fill out the form below.
