1. Avoid Lifestyle Inflation
When you get a higher paying job or earn a raise, it’s often difficult not to increase your spending as a result. Typically, more income means fancier vacations, a bigger house, or a nicer car. This is known as lifestyle inflation, where your spending increases as a result of more income.
While it doesn’t hurt to reward yourself a bit for all your hard work, it’s important not to go overboard. If you do get a pay raise, be sure you make adjustments to your savings accordingly. The goal is to save more while living within your means.
2. Track Your Spending
Understanding where your money goes is an essential part of saving. It’s a good idea to write down everything you spend money on during a month. Then, take a look at your overall spending and determine which areas you may be able to spend less on or cut out completely.
Next, take the amount you’re saving and put it into an account, separate from your checking account. Make the process effortless by setting up payroll deduction or automatic transfers.
If you’re contemplating adding a new expense to your life, carefully weigh out the reasons behind the expense. Is it something you absolutely need? Or will it contribute to more debt without adding any significant value to your life?
3. Maximize Your Employer Benefits
If your employer offers a matching contribution to your retirement plan, ensure you maximize those benefits first. After all, it’s free money. If you’re unsure what contributions your employer offers, make it a priority to speak to them about the available retirement plan benefits.
4. Eliminate Credit Card Debt
Credit card interest will almost always be more than what you’re earning on your investments, particularly with high-interest store-sponsored and bank credit cards. Be sure to first focus on paying off your credit cards. Then, devise a plan to use them only in emergency situations, with the intent of paying them off in full as soon as possible.
5. Analyze the Impact of New Debt
Remember, any new debt you add can directly impact your retirement savings. While some debt is unavoidable, be sure that it doesn’t affect how much you are putting towards your retirement. If you do have to take on more debt, take a look at your overall expenses, and see if there are areas you can cut back to keep your retirement savings constant.
6. Pay Off Your Car Loan
It’s a great feeling being able to drive around in a car you own with no payments. Even though a vehicle’s value typically depreciates, you can think of your car as a solid investment. That’s because after you pay it off, the money you would be paying towards payments can help boost your savings. Use what would have been your monthly car payment to pay yourself – into your retirement savings.
7. Allow Yourself Some Splurging Income
There is no reason why you shouldn’t be able to spend some of your hard-earned money on yourself. But you need to consider your budget first. Decide on how much “fun” money you can afford and put it aside for splurging. However, it’s important that this “splurging fund” doesn’t impact your current retirement savings. Be sure to balance out the two, so you come up with a financial plan that works.
1. Consult with your tax advisor for further details about tax implications of IRA savings accounts.