If you feel like you could do more to improve your saving and investing habits, or don’t know how to get started, here are some tips that can help.
Financial experts agree that there are two important things to focus on: start and contribute regularly to an emergency fund, and contribute at least 10% of your paycheck to a retirement account. But for many, this isn’t so easy. According to America Family Financial Statistics*, the average savings balance for American households is $3,950 and $35,000 for retirement. Forty percent of families aren’t saving for retirement at all, and 25% have no emergency savings.
Where to Park Emergency Cash
To start or bolster an emergency fund, set up automatic payroll transfers to a designated savings account, preferably one that is not connected to your checking account, to avoid dipping into it. Your first goal should be to save at least $1,000. Remember, this fund is earmarked for true emergencies—like when your car breaks down or the roof leaks. To help you figure out your savings contributions, try the American Institute of CPAs’ (AICPA) online Emergency Savings Calculator, located at FeedthePig.org.
In addition to basic savings accounts, many credit unions offer higher yielding savings accounts. You might also consider an account that invests in money market mutual funds. These are conservative funds that invest in short-term bonds and yield a much better interest rate than savings accounts do.
Count Yourself in With Retirement Accounts
One of the greatest perks many working Americans have access to today is their company’s 401(k), 403(b), or 457(b) plans, because in most cases, employers will match retirement contributions—typically from 2% to 8%. If you’re just starting out in your career—always contribute at least the max of the match, otherwise, you’re just walking away from free money. If you’re more established, work on boosting that percentage over time. The annual contribution to a 401(k) plan is $18,000; if you’re 50 or older you can contribute an extra $6,000. Your contributions are deducted automatically from each paycheck and use pre-tax dollars, so you’ll only pay taxes on that money as you start withdrawing it in retirement.
Most company-sponsored retirement plans offer a mix of investments to choose from, as well as complimentary guidance on how to choose them. Take advantage of this free advice—it’s a benefit of your employment. Many plans offer target date funds, a mix of stocks, bonds and cash which are based upon your age and the date you plan on retiring. This mix grows more conservative as you get closer to your retirement date. It’s a more simple approach to investing because it makes the asset allocation decisions for you.
Accounts for the Self-Employed
If you’re a small business owner or are self-employed, you have several accounts to help you save for your future. For instance, a Simplified Employee Pension Individual Retirement Account (SEP IRA) can be used by both owners and their employees. For individual business owners without employees, a Solo 401(k), is a flexible option, because it uses either pre-tax or after-tax contributions. The beauty of both SEPs and Solo 401(k)s is you can invest significant amounts to boost your savings. According to IRS guidelines, the maximum contribution for 2015 is $53,000. For more information, visit the IRS website and search ‘small business resources.’
And don’t forget Traditional or Roth IRAs, which anybody can use to save for retirement, including stay-at-home spouses. If you choose a Traditional IRA, your money grows tax deferred until you withdraw it. A Roth uses after-tax earnings so your earnings and withdrawals are tax free. For more information about IRAs, search ‘Which IRA is right for you?’ on the SchoolsFirstFCU website.
Have More Questions?
Call or meet with a SchoolsFirst FCU financial advisor to discuss your current situation, and develop a financial plan that fits your needs.