With Halloween having come and gone and stores now ramping up to sell Thanksgiving turkeys and other holiday treats, 2013 is quickly drawing to a close. This brings colder weather and the inevitable task of raking leaves, but it also presents an opportunity to take a moment and analyze employment benefits, spending for the year, and a budget for 2014. I am joining a group of financial writers to encourage people to increase their savings in 2014 by 1%. One of the easiest ways to increase savings is through a retirement account, the most common of which I have discussed previously. The related benefits to increased savings can be demonstrated using the grade school theory of the "5 W's".
WHO needs to increase their savings by 1%?
Anyone that wants to retire or anyone that pays taxes. Everyone has an idea of what they want to do in retirement. Whether they want to travel the country in an RV, play golf everyday, or move to Italy, all of those activities require money. Since it is rare for people to work and earn an income in retirement, those dreams require a nest egg to become a reality. Employees that participate in a 401(k) plan or similar arrangement can enjoy tax benefits by increasing their retirement contributions. Contributions are not included in taxable income, so for a taxpayer in the 25% tax bracket, every dollar contributed saves approximately 25 cents in taxes.
WHAT money should be used to increase savings by 1%?
This is the biggest challenge for most people trying to increase savings. "I want to save more, but I also want to keep my subscription to HBO!" Instead of looking at the savings goal in total, break it down into monthly or weekly amounts. A goal to increase savings by $1,000 for a year is only $83/month and $19/week. That equates to not eating lunch out 2 days a week, one less round of golf a month, or no more lattes on the way to work. Taxpayers that typically receive a refund on their taxes can also consider adjusting their withholdings in order to keep more of that money during the year. By decreasing tax withholdings and increasing retirement contributions by an equal amount, the taxpayers net take-home pay does not change. But, the taxpayer will not receive a large refund on their tax return, and that money will have been saved towards retirement.
WHERE should savings be increased by 1%?
As discussed above, a qualified retirement plan offered through an employer is the easiest place to start. If that's not available, a Traditional or Roth IRA can accomplish similar objectives. There are also a variety of options available for the self-employed. IRA accounts can be opened at almost any brokerage such as Vanguard, Fidelity, or TD Ameritrade.
WHEN should savings be increased by 1%?
As soon as the opportunity presents itself. Several large employers use November and December as "benefits season", giving their employees the opportunity to adjust their benefits, including retirement plan contributions. Taxpayers contributing to IRA's can make contributions for 2013 by the date their 2013 tax return is filed or 4/15/14, whichever earlier.
WHY should savings be increased by 1%?
Aside from the reasons already listed above, increased retirement contributions align with the time value of money concept. In short, the time value of money means $1 today will be worth more in the future. For example, $1,000 today, growing at an average rate of 5% annually for 40 years will be worth $7,040. These calculations can be made here.
The savings rate in our country has dropped from 5% last year to 4.6% this year. From an accounting sense, that indicates that current obligations are being met, but future obligations are likely to not be met. So, I encourage you to put pencil to paper and see where you can adjust your finances to give yourself a raise in 2014 by increasing your savings by 1%. If anything I have given you a reason to put off raking those leaves for another day.
This post encouraged by the Financial Duckmail blog - see their site and other works here.