401(k)
Last week I talked about the savings rate hitting a 15 year high and showed how you could calculate your disposable income. Over the next series of posts I will describe some of the savings vehicles you should consider for some of this disposable income.
The first and probably most important savings vehicle is the 401(k). For those of you who work for a school district or non-profit, you might have an option called a 403(b). If you are able to invest in a 403(b) you should do so. While not exactly the same as a 401(k) it offers many of the same benefits and should be one of the first places you set aside some of your disposable income.
If your employer offers a 401(k) you need to get into this program, if you are not already enrolled. If you are enrolled, you need to examine your level of contribution.
A 401(k) is a tax deferred retirement plan that is established by employers to which eligible employees may make salary deferral contributions on a pre-tax basis. Employers offering a 401(k) plan may make matching contributions on behalf of eligible employees and may also add a profit sharing feature to the plan. Earnings in the account grow on a tax deferred basis which means you only pay tax when you withdraw the funds. This is typically after retirement when you are probably in a much lower tax bracket.
Many employers match any contributions you make up to a certain maximum. If you can, you should contribute at least as much as the company match, and more if you can afford it. For example, if the company will match 50% of all contributions up to 5% of your annual salary, you should make sure you are contributing at least 5%. The company match is essentially free money and will help you to grow your retirement balances even faster.
Learn a lesson from me on this one, put away as high a percentage as you can right away. When I started I put 1% of my income into this plan and thought I couldn’t afford to do any more. I then increased it to 2% and was amazed at what a difference it made. Now, I max. out my contribution. I just continue to wonder what my 401(k) balance could have been had I maxed out as soon as I was eligible. While I don’t know what the actual number would be, I do know it would be significantly more than I have now.
To illustrate the power of this, check out the numbers. For illustration purposes lets assume an annual salary of $40,000, a 5% rate of return on the 401(k) and the company match noted above. Contributing 1% of your salary would result in a balance at the end of 25 years of $29,406, increasing that contribution to 5% would result in a balance at the end of 5 years of $147,030, a huge difference.
If you are not currently enrolled in a 401(k) plan at work, enroll today!
If you are not maxing out your contribution, find a way to max. out your contribution. A little more saved today in a 401(k) will turn into a big nest egg in the future.
Monday, June 29, 2009
Friday, June 26, 2009
Personal Savings Rate at 15 Year High
Personal saving as a percentage of disposable personal income was 6.9% in May, the Commerce Department said, up from 5.6% in April and 4.3% in March. We have not seen levels this high since before 2000.
This should come as no surprise to those of you who have read my column in the past. This is a topic we have been talking about for months and I have been provided guidance on the need for savings and ways to save.
Do you know what your disposable income is? How much do you have available for what you really want after you pay what you need? To help you find out, here is a fun little calculator http://www.disposableincome.net/. The goal is to now take that disposable income and allocate out to savings and the fun things in life you want, but don’t necessarily need.
As I have mentioned before, you need to “Pay Yourself First.” This means setting aside some of the disposable income into various savings options before you start spending on the discretionary items in your life. So, what savings vehicles should I use? Well, that will depend on your specific goals, risk tolerances and the time you can afford to leave the funds in the account. So you will need to determine what works best for you.
In the coming weeks I will go into detail on some savings options you should consider.
Sunday, June 21, 2009
It’s Easy to Save, Here’s How
All too often I hear from people that they just can’t save. When I dig into the details, I uncover many opportunities for saving. It’s not that people can’t save, they just don’t know how. Not matter how much you make, there are probably many ways you can cut back on expenses and take those savings and put them into a savings account and watch your money grow.
As I have pointed out in other columns, it is important for you to have an emergency fund. This fund should be at a minimum equal to 3-6 months of your monthly living expenses. So if you spend $2,000 each month, your emergency fund should be between $6,000 - $12,000.
My last column "Pay Yourself First", explained how to make savings a priority by setting up regular, recurring payments to a savings account. You need to make saving a priority, just like with your mortgage or rent payment. Also, you need to make it automatic. If you don’t see it you won’t spend it. By deducting a set amount from each paycheck you will be amazed at how quick your savings will add up.
Unlike the government, most families can’t spend more than they make. So first you need to understand where you are spending your money and then identify if there are areas where you could cut back or eliminate spending. By doing so you will be able to save even more.
So how can you find the money you need to fund your emergency fund?
Consider these options:
While this list is by no means all inclusive, it will hopefully get you thinking about what you can do in your own individual situation.
Get started today and it will be really easy for you to have over $1,000 in savings in less than a year. Savings can be easy, but it requires some sacrifice. The beauty is that the sacrifice has rewards. A little saved now adds up to a lot later.
As I have pointed out in other columns, it is important for you to have an emergency fund. This fund should be at a minimum equal to 3-6 months of your monthly living expenses. So if you spend $2,000 each month, your emergency fund should be between $6,000 - $12,000.
My last column "Pay Yourself First", explained how to make savings a priority by setting up regular, recurring payments to a savings account. You need to make saving a priority, just like with your mortgage or rent payment. Also, you need to make it automatic. If you don’t see it you won’t spend it. By deducting a set amount from each paycheck you will be amazed at how quick your savings will add up.
Unlike the government, most families can’t spend more than they make. So first you need to understand where you are spending your money and then identify if there are areas where you could cut back or eliminate spending. By doing so you will be able to save even more.
So how can you find the money you need to fund your emergency fund?
Consider these options:
- Bring your lunch to work instead of eating out. This could net you $25 per week, which could turn into $1,300 in one year.
- Dine out 1 less meal per week. For a family of four this could mean a savings of $25 per week, which is $1,300 per year.
- Make your own coffee instead of buying that cup of Starbucks or eliminate one or two cups a week. This could save you $10 per week or $520 per year.
- After you pay off your car loan, or other loan, keep making the payment, but deposit it to your savings account. If the payment was for $250, this would increase your savings by $3,000 in one year.
- Next raise you get at work, save the increase. Determine the change in your net pay and set up an automatic deduction to transfer the additional net pay to your savings. You are already meeting your expenses, more in your checking many just cause you to spend more. If your net pay increased $50 per paycheck that would result in $1,200 in savings. (assumes 2 pay periods per month)
- Keep your change. Only use bills when making purchases with cash and deposit the loose change in a container. After a few weeks take the container to the bank and deposit the loose change. What you thought was just of bunch of coins can turn into $20 - $30 per month.
While this list is by no means all inclusive, it will hopefully get you thinking about what you can do in your own individual situation.
Get started today and it will be really easy for you to have over $1,000 in savings in less than a year. Savings can be easy, but it requires some sacrifice. The beauty is that the sacrifice has rewards. A little saved now adds up to a lot later.
Thursday, June 4, 2009
Pay Yourself First
Many consumers treat savings as an afterthought and only save when there is something leftover. If there is anything left from the paycheck at the end of the month, then they think about saving that. Unfortunately, most consumers will find a way of spending all or nearly everything they make if they leave it in their checking account. If they know they have money available, the impulse to buy, combined with the availability of funds will often trigger a purchase decision. But by paying themselves first, they will reduce that amount available to spend and ensure that something goes into savings every pay period and reduces the possibility of overspending.
While many people talk about “Paying Yourself First”, do consumers really know how to do this? What does “paying yourself first” really mean? It means making yourself a priority and putting your future ahead of all other competing demands. It means taking money out of your paycheck before it has a chance to be spent on bills, food, or any other part of your life. In essence, you become the first budget item paid each pay check, before all the bills and discretionary purchases.
Our goal should be to help our customers to “Pay Themselves First”. So what can we do to help? First, it is not so important how much you set aside each paycheck it is making sure you set aside something each paycheck. And, more importantly, it needs to be automatic. If you don’t see it, you can’t spend it.
There are several ways to automate the savings process, but having a set amount deducted from each paycheck and directly deposited to a Savings or Money Market is the easiest. Your customer can simply supply their employer with the routing and transit number and the account number where the funds are to be deposited.
If their employer does not have direct deposit or requires all the funds to be deposited into one account, we can accommodate that also. Setting up a systematic transfer from Checking to Savings each month is something you can easily set up for them. Or, if they prefer, they can even do this themselves in online banking.
The key for your customers is to get the process started and then monitor how they are doing over time. If a transfer of $25 per paycheck is working well and they still have adequate funds to cover expenses at the end of the pay period, consider moving that to $50. Initially, the task may seem impossible, but your customers will be amazed at how they don’t even notice that their net deposit to their checking is lower. What they will notice is how quickly the balance in their savings account will increase. If they set aside just $50 per semi-monthly paycheck, this would grow to over $1,200 in a year, which becomes $2,400 after two years and $6,000 after 5 years.
This recent economic crisis has taught all of us the need to save.
Make it a point to "Pay Yourself First" with your next paycheck!! You will be amazed at how easy it is and how you can adapt your spending habits.
For the adventurous of you, consider a more radical approach. Instead of depositing you paycheck to your checking and transferring a portion to your savings. Why not deposit the entire paycheck to your savings and only transfer to your checking what you have budgeted to spend for the month. This will ensure you are disciplined about your spending and will help you maximize the amount you save each month.
No matter which method you choose, it is just important to start.
Good Luck
While many people talk about “Paying Yourself First”, do consumers really know how to do this? What does “paying yourself first” really mean? It means making yourself a priority and putting your future ahead of all other competing demands. It means taking money out of your paycheck before it has a chance to be spent on bills, food, or any other part of your life. In essence, you become the first budget item paid each pay check, before all the bills and discretionary purchases.
Our goal should be to help our customers to “Pay Themselves First”. So what can we do to help? First, it is not so important how much you set aside each paycheck it is making sure you set aside something each paycheck. And, more importantly, it needs to be automatic. If you don’t see it, you can’t spend it.
There are several ways to automate the savings process, but having a set amount deducted from each paycheck and directly deposited to a Savings or Money Market is the easiest. Your customer can simply supply their employer with the routing and transit number and the account number where the funds are to be deposited.
If their employer does not have direct deposit or requires all the funds to be deposited into one account, we can accommodate that also. Setting up a systematic transfer from Checking to Savings each month is something you can easily set up for them. Or, if they prefer, they can even do this themselves in online banking.
The key for your customers is to get the process started and then monitor how they are doing over time. If a transfer of $25 per paycheck is working well and they still have adequate funds to cover expenses at the end of the pay period, consider moving that to $50. Initially, the task may seem impossible, but your customers will be amazed at how they don’t even notice that their net deposit to their checking is lower. What they will notice is how quickly the balance in their savings account will increase. If they set aside just $50 per semi-monthly paycheck, this would grow to over $1,200 in a year, which becomes $2,400 after two years and $6,000 after 5 years.
This recent economic crisis has taught all of us the need to save.
Make it a point to "Pay Yourself First" with your next paycheck!! You will be amazed at how easy it is and how you can adapt your spending habits.
For the adventurous of you, consider a more radical approach. Instead of depositing you paycheck to your checking and transferring a portion to your savings. Why not deposit the entire paycheck to your savings and only transfer to your checking what you have budgeted to spend for the month. This will ensure you are disciplined about your spending and will help you maximize the amount you save each month.
No matter which method you choose, it is just important to start.
Good Luck
Monday, June 1, 2009
Lessons Learned from the Current Economic Downturn
The Commerce Department last week said the personal savings rate edged up to 4.2% of after-tax incomes in March, up from 4% in February. Households have spent less and saved more as they seek to replenish depleted nest eggs in the face of massive job layoffs and the uncertainty in the economy. While the savings rate has been increasing, a third of Americans have no emergency savings fund, according to the National Foundation for Credit Counseling; 57% of those who have a fund don't have enough in it.
How many of your clients have an emergency fund? Do they have enough in this fund? Do they know how much they need in that fund?
These are all questions we can help answer for our customers and prospects. This consultative and education oriented approach is what set our bankers apart. We continue to work with our clients to provide them with the information and resources they need to meet their financial needs.
If you have customers who have not yet set up an emergency fund or who do not have a sufficient amount set aside, now is the time to reach out to them. They will appreciate the call and will thank you for helping them to become more financially fit.
The process of setting up an adequate emergency fund is a simple 3 step process.
Step 1 – Determine amount needed in the emergency fund
Before you can determine how much your client needs in the emergency fund, they need to understand how much they spend each month. As tedious as it may seem, the best way to accomplish this is to go over the past three months of outflows to get a monthly average of expenses.
Once your client determines the avg. monthly expenses, the rule of thumb is that they should have three to six months of living expenses in this emergency fund at a minimum. For those who can afford to or who have less secure forms of income, twelve months would be even better.
Step 2 - Create a Savings Plan
This is the most important step. Clients have to be disciplined and need to be realistic as to how much they can set aside each month and how quickly they can build up the account. It will be made much easier for them if they set up automatic transfers or deposits to this emergency fund. If you don’t see it, you don’t spend it. The goal is to get the fund created as quickly as possible and setting up these automated deposits will ensure the fund continues to grow.
Step 3 – Watch it Grow, Leave it Alone
Your client should monitor the account, but not touch the funds unless it is really for the unplanned emergency expenses they were intended to fund. Your client should also make sure that they adjust the amount in the fund based upon life changes or changes in monthly expenses. An annual review with them will ensure that they keep an adequate balance and that the fund keeps up with their changing lifestyle.
Who will be the first in your office to set up and emergency savings fund?
How many of your clients have an emergency fund? Do they have enough in this fund? Do they know how much they need in that fund?
These are all questions we can help answer for our customers and prospects. This consultative and education oriented approach is what set our bankers apart. We continue to work with our clients to provide them with the information and resources they need to meet their financial needs.
If you have customers who have not yet set up an emergency fund or who do not have a sufficient amount set aside, now is the time to reach out to them. They will appreciate the call and will thank you for helping them to become more financially fit.
The process of setting up an adequate emergency fund is a simple 3 step process.
Step 1 – Determine amount needed in the emergency fund
Before you can determine how much your client needs in the emergency fund, they need to understand how much they spend each month. As tedious as it may seem, the best way to accomplish this is to go over the past three months of outflows to get a monthly average of expenses.
Once your client determines the avg. monthly expenses, the rule of thumb is that they should have three to six months of living expenses in this emergency fund at a minimum. For those who can afford to or who have less secure forms of income, twelve months would be even better.
Step 2 - Create a Savings Plan
This is the most important step. Clients have to be disciplined and need to be realistic as to how much they can set aside each month and how quickly they can build up the account. It will be made much easier for them if they set up automatic transfers or deposits to this emergency fund. If you don’t see it, you don’t spend it. The goal is to get the fund created as quickly as possible and setting up these automated deposits will ensure the fund continues to grow.
Step 3 – Watch it Grow, Leave it Alone
Your client should monitor the account, but not touch the funds unless it is really for the unplanned emergency expenses they were intended to fund. Your client should also make sure that they adjust the amount in the fund based upon life changes or changes in monthly expenses. An annual review with them will ensure that they keep an adequate balance and that the fund keeps up with their changing lifestyle.
Who will be the first in your office to set up and emergency savings fund?
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