A year ends, another begins, and everyone tries to set off on the right foot with resolutions to get fit, save more, and spend more time with loved ones.
We can’t make you go to the gym or rework your schedule with family, but we can help you get a long way toward that second goal — saving more money.
Saving is actually the easiest thing to do by far, and that’s because it’s the one thing you can do automatically. Unlike most other resolutions, saving typically involves a one-move decision process.
After that, no discipline required. So how can you save more in 2019?
Step one: Review your withholding
If you draw a paycheck, at some point you filled out a W-4 form with your employer. That form tells your company how much money to hold back to pay your state and federal taxes.
Nearly eight out of 10 taxpayers get tax refund each year, to the tune of hundreds of billions of dollars. That sounds great, but over-withholding is just loaning the government cash interest-free.
You can adjust your withholding at any time, but why not make it a resolution to review your assumptions every January? Doing so is likely to put a little more into each check, which leads to step two.
Step two: Increase your 401(k) contribution
Here’s where things get interesting. You can learn how much a withholding change will up your paycheck amount.
But what happens when you increase your 401(k) contribution as well? One immediate impact is that your taxable income drops. That means lower taxes and even more in your check.
Plug your numbers into a handy paycheck calculator. You’ll learn that there’s a gap between what you put into your retirement account and actually comes out of your check in dollars.
The difference in these numbers is the tax savings, check by check. You might even choose to save more than you had figured, given the reduced impact.
Step three: Reinvest gains and dividends
One of the really big ideas that a lot of people miss early on is that your investments will compound over time. The more you save early on, the more you will have later.
Part of the reason for this is the active decision to reinvest gains in your investments. Don’t let cash dividends pile up. Most mutual funds reinvest that cash automatically, creating a flow of contributions that then creates even more dividends.
This virtuous cycle turns into a kind of positive feedback loop, adding to whatever contributions you elect to make from your current pay.
Save long enough and reinvested cash will swamp your actual savings year to year.
Do these three things early in the year, every year, and you really don’t have to think that much about saving the rest of the year, assuming you set aside a reasonable amount.
That way, you can focus instead on running a few days a week, maybe with your family.
MarketRiders, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.