Prioritize Savings Now

When we meet with retirement plan participants, an almost universal recommendation is to try to increase savings each year by one percent. But in order to get to that extra one percent, you have to be maintaining a positive cash flow. And the best way to establish and maintain savings is to prepare a budget. Start by evaluating your bank and credit card statements and possibly creating categories for every expense. You can also plan and add together all other one-time expenses that will happen during the year (for example, property tax in May, a vacation in August, etc.). This process will help you to assess your spending and look for savings opportunities.

Once you have determined your monthly and annual savings capacity, and established an appropriate emergency fund (we recommend between three and six months of living expenses), you may want to start saving in an investment brokerage account. This type of account is helpful in saving for larger spending goals such as a new car, house, or wedding. Depending on the timing of your cash flow needs, you have the flexibility to manage your investments to meet each goal — whether to invest in stocks, mutual funds, or exchange-traded funds for longer-term goals, or fixed income and money market for shorter-term goals.

If you need help in prioritizing your spending and savings, feel free to reach out. We have tools we can provide to help with budgeting, so that you can commit to a consistent savings program for the future.

Other saving vehicles

Sometimes it is easier to build a habit of savings by paying yourself first. And the easiest way of doing this is through a payroll deduction into a company-sponsored retirement plan. Those accounts are provided by most employers, and most of them offer a match to a certain level of your salary or savings. A goal for appropriate retirement savings level is around 15 percent of salary, including your own salary deferral and employer match.¹ However, if you are just starting out, you may only be contributing enough to get the full employer match. In this case, we encourage participants to increase that deferral percentage by one percent per year, which usually results in manageable changes to the actual take home pay and further develops your savings habit.

If you still have positive cash flow after funding your retirement plan and setting up your short and long-term savings program, then you can start to look for other opportunities to save. Depending on your medical insurance options, one opportunity could be contributing to a Health Savings Account (HSA). If you have young children for whom you want to fund education costs, then you might be looking at 529 plans. Did you know that even if you are maximizing contributions to your 401(k) plan, you can also fully fund an Individual Retirement Account (IRA)? It may not be tax deductible, but after-tax IRA contributions grow tax-deferred and build basis in your IRA that will reduce taxes due when you withdraw these amounts.

Clearly, establishing a robust savings program can help you weather all sorts of financial storms. Starting this process early is key to meeting your financial goals due to the power of compounding. The compound effect happens when your assets generate earnings which are then reinvested or remain invested to generate their own earnings.

Let's give a couple of examples:

• Nick plans to invest $1,000 for 10 years at an annual interest rate of 5 percent. The future value is calculated as: $1,000 x (1 + 0.05)10 = $1,629. This happens all without any additional investment.
• Alexander invests the same initial amount, except he invests another $600 each year (or $50 per month). At the end of ten years, Alexander will have $8,245 thanks to his initial investment and the compounding effect of the 5 percent interest.

All of these savings vehicles have their own uses, rules, and regulations. Feel free to contact us for more information and to see which fits with how you are looking to save for your future goals.

Meet Kristan L. Anderson, CEBS®, CFP®, Dir. Of Retirement Plan Services & Dir. Of Financial Planning and Rasti Nikolic, Associate Financial Planner.

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¹https://www.fidelity.com/viewpoints/retirement/how-much-money-should-I-save

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