February 5, 2024
Saving Today to Better your Tomorrow
Saving our money for the future is much easier said than done. We all want to have healthy savings habits, but there is often something more fun to do with that money.
Make a conscious effort to set aside money in your budget for retirement, debt reduction and savings. It is developing the habit that matters more than the amount set aside in each category, so come up with a number that you know you can stick with and that won’t be painful. There is plenty more to consider, so we've suggested some tips and solutions to help you #ThinkLikeASaver.
Automating your savings
Automating your savings is the easiest and most effective way to save. Whether you are saving for the unexpected, retirement or all things in between, automatically adding to your savings account makes reaching your goals easier and more attainable.
- Paycheck Deductions: Contributing to retirement plans such as 401(k)s and 403(b)s is not only a simple way to “set and forget” your savings, it also tends to come with great tax benefits as well as a matching contribution from an employer. Be sure to contribute at least enough to receive the match – that's free money! More on this below.
- Automatic Bill Pay: By setting your bills on automatic payment, you can save extra money each month that can be used to pay down debt and limit interest payments. You will also avoid late fees and missed payments, which will help boost your credit and keep your rates lower.
- Automatic Transfers: Making the decision to add money to an emergency fund or a 529 college saving account can be challenging as you navigate other financial obligations. Automating a monthly transfer to one of these accounts and treating it as one of your regular bills is a great way to take emotion out of the process.
- Automatic Escalations: By setting up your contribution percentage to increase a little every year, you can boost your savings with little effort. This can be a terrific way to ease into larger saving over time.
Saving money is usually more about mindset than math. Click here to learn more about using Cape Cod 5‘s online transfer tool to automate your savings and commit to paying yourself first. To help calculate your savings goals, visit our I Want to Grow My Savings resources.
Preparing for retirement
Preparing for retirement can easily be pushed into the “someday” category, as we focus on the more immediate present-day needs and expenses, which explains why most consumers do not have a plan for retirement savings that is adequate to maintain their desired standard of living. Opening an account, linking your bank account for automatic transfers, and choosing the appropriate index fund should take no more than an hour – a small investment of your time that will pay off incalculably down the road.
Traditional and Roth IRAs
- Traditional IRA: In a traditional IRA, contributions are made pre-tax, reducing one’s income taxes for the year they are made. Eligible retirement withdrawals are taxed.
- Roth IRA: In a Roth IRA, contributions are made with post-tax income so eligible retirement withdrawals are made tax-free. There are income limits associated with this type of account.
- Learn more about Traditional vs. Roth IRAs
Employer-Based Retirement Accounts
- 401(k): Employees can make contributions into their retirement accounts by automatically withholding a set amount from every paycheck. Employers often match a certain percentage of your contribution, free money that we encourage you to take. 401(k)s can be set up as either traditional or Roth, just like IRAs.
- SEP IRA: Employer-sponsored plan. Employers, not employees, make contributions. It operates like a traditional IRA with the ability to receive employers’ contribution and higher limits.
Employer-Based or Set up with an Investment Firm
- Health Savings Accounts (HSAs): An HSA is like a tax-free emergency fund and retirement account rolled into one. Not only can you use it to pay for real-time qualified medical expenses, but you can also build it to use for longer-term qualified medical expenses, including those that come in retirement. Contributions are made pre-tax, growth is tax-free and qualified withdrawals are tax-free. HSAs are the only savings vehicle with this triple tax advantage. Please note: you must have a high-deductible health insurance plan to qualify.
Most advisors would recommend working toward saving at least 15% (including any match) of your pre-tax income for retirement. Treat your retirement saving like any other monthly payment. Set aside an amount in your budget that you know you can afford and automate those savings by setting up an automatic account transfer or withholding a set amount every pay period. Reevaluate this annually and make adjustments as your budget allows. We encourage you to speak with an accountant or tax advisor to determine which plan works best for your individual situation.
Saving for the unexpected
Saving for the unexpected is an important consideration when setting money aside, granting you the power to plan for the unplanned. There are several ways to automatically set money aside for the unbudgeted expense.
- Savings Account: Having an emergency fund in place is a critical first step to anyone’s long-term financial health. Start with an amount you know you can afford and set up an automatic transfer into a separate savings account. Work to build up your emergency savings to cover 3-6 months of living expenses. Look for high-yield savings accounts, where the interest will help to give your money an extra boost!
- Health/Flexible Savings Accounts: Contributing to HSAs and FSAs is a wonderful way to prepare yourself for both expected and irregular medical costs. The money can be automatically set aside in your paycheck and spent tax-free on any qualified medical expense. Most importantly, having this money available encourages us not to skip doctor visits or prescriptions because of the out-of-pocket costs.
- Roth IRA: Because you can contribute to a Roth IRA with income that has already been taxed, you can withdraw contributed sums (but not any of the earnings) at any time without taxes or penalties. In that way, a Roth IRA can double as an emergency savings account if you are in a pinch. Given the importance of retirement saving, it is strongly encouraged that you use your Roth in this way only as a last resort. Be sure to consult with a tax advisor or accountant.
- Insurance: Health, auto, home, disability, and life insurance, while not technically savings vehicles, are important pieces to one’s emergency saving considerations. Having these safety nets in place helps limit your financial exposure if bad luck comes your way.
For more savings resources, visit www.capecodfive.com/personal/financial-calculators. Creating short- and long- term savings plans that allow you to pay down any debt and prepare for the future is not only a smart savings strategy, it also helps to set you up for financial peace of mind.
As we’ve outlined, there are numerous tools and tactics to aid you in your savings journey, so don’t hesitate to utilize them and begin your journey to #ThinkLikeASaver.
Financial Know-How Program Manager
Jim joined Cape Cod 5 in 2018 and has been the Financial Know-How Program Manager since 2020. He has a degree in Psychology from Catholic University in Washington D.C. and is a graduate of the New England School of Finance, a two-year program offered by the Massachusetts Bankers Association and hosted at Babson College. Jim is an active member of the community, serving as an advisor to a local nonprofit and on the Barnstable High School Business Innovation School steering committee. He lives in Plymouth with his wife Brigid.