Most employers offer a matching contribution to a 401(k) account up to a certain percentage of your gross salary. Whether it is a dollar for dollar match or a 50% match (i.e. $0.50 contributed for each $1.00 you contribute), that is money ready to be handed out to you simply for setting aside money for retirement. And that is something that you should be doing anyway. Bloomberg reports that 91% of 401(k) participants belong to a plan that offers a match. Make sure you are enrolled in your employer's 401(k) matching program and increase your contribution percentage to the maximum matched by your employer. The earlier you start saving, the more you will have for retirement.
The key to building a reserve is obviously not to spend it. There are many reasons to build a reserve including emergencies, education for you and/or your children, retirement, or other large purchases. The bigger the reserve for each of these purposes, the more likely you'll be able to avoid debt when they come around. Although, you can't exactly go into debt to build your retirement fund as you may be able to with other situations.
The most important reserve to start is a cash reserve. Your reserve for unexpected emergencies requiring cash payout needs to be in liquid investments. That means it could be in the form of cash itself, a checking or savings account where it can be withdrawn quickly, or even a money market account. With each of these, the interest earned increases ever so slightly. Cash in your house will earn nothing, while cash invested in a money market account may earn dividends slightly larger than what you may get from a savings account at a bank or credit union. All of these locations are liquid and allow you to access the cash when it is needed. My rule of thumb is to keep enough cash in these locations to live off of for at least 3 to 6 months if you were to have no income. The amount will differ for everyone based on their spending habits. This will allow 3 to 6 months to find another source of income, most commonly to replace a lost job, or provide for a large unexpected payout without other consequences.
Having enough cash on hand will bring greater peace of mind, knowing that when the unexpected comes along you will have enough cash to get by without falling into a more difficult situation.
How many times have you wished that you had more money? Whether it is to make a fun splerge or to have more to pay monthly bills, it's probably safe to say that most people wish they had more money to spare, especially when times are tighter as they are in today's economy. Building a financial reserve will bring a greater peace of mind. It may also save you when that unexpected emergency comes along.
The key to building such a reserve lies in your action of diligently setting aside whatever amount is deemed appropriate on a regular basis as well as in in the principle of the Time Value of Money. Yes, setting aside a budgeted amount each week will increase your reserve over time, but just as important, the time value of money works on increasing it the form of interest or other returns.
What is the Time Value of Money? The basic notion is that one dollar today is worth more than one dollar in the future. No, this is not actually due to inflation, but rather that your dollar set aside today will earn a percentage return if invested or placed somewhere other than beneath the mattress. If you set aside $100 now in a savings account that is earning 1% interest, then you will have $101 in one year. You may say that doesn't sound like much, so that is why finding an investment with a much better return is important. A modest return may be around 6%, meaning that $100 returns $6 and turns into $106 by the end of the year. Not much better? Well, that is why consistent saving is the key. Compound interest then begins to work in your favor. $100 put into that same account in the second year means that interest is earned on the $106 and the additional $100. That result is interest paid of $12.36. The fist year only paid you $6 and now the second year is paying you more than double that. I think you can probably start to see the pattern and apply it whether you are adding that $100 each month, each paycheck, or each week. The interest or return you get begins to build on itself rather quickly.
Many organizaitons and universities use such a principle when obtaining grants to fund certain campus projects. The funds required to construct a building, for example, are obtained and spent while an additional amount to maintain the building into perpetuity is obtained. That doesn't mean that infitnite dollars are being poured into the building, but that an amount is set aside to pay for the maintenance of the building. The amount set aside earns it's own income in the form of returns that exceeds the cost of maintaining the building. In other words, the money is doing the work. Individuals can also slowly build up such a reserve on the same principle.
The key to building your reserve is to not spend it. This may sound obvious, but many find themselves wanting that little extra cash for a new toy. Limit the reasons to tap into this reserve, and spend it for emergencies only. Don't spend the rainy day fund on a bright sunny warm day or you may regret it when the clouds start looming overhead.
Building a strong financial foundation for you and your family now and down the road isn't just built on making more money. There are five keys that need to permeate our thinking and drive our actions. Focusing on such principle-based keys help create the right frame of mind that changes our financial behavior. Only then can one truly build a strong financial foundation that can withstand any economic storm that comes our way.
Key 1: Avoid Debt
Key 2: Use a Budget
Key 3: Build a Reserve
Key 4: Give to Charity
Key 5: Teach Others
These may seem straight forward on the surface, but finding personal ways to apply these principles in their truest sense can take a long time to master. We will be diving into the details in the future to help us all build a strong financial foundation that can withstand any economic conditions.
Whether you are employed or self-employed, you want to take advantage of a Flexible Spending Account (FSA) or Health Savings Account (HSA) to pay for healthcare expenses using pre-tax dollars. This saves you at least the amount of money that you would have paid in income taxes on the amount you set aside for these plans. You will have to check with your employer to determine which plan may be offered and details for setting it up.
Better to Over-estimate than Under-estimate:
Yes, at the end of the plan year you lose the amount of money left in your account if it is not spent. But remember that unless that amount exceeds the amount of tax you would have paid on that income, you are still better off. A quick example may help illustrate: Assume you are in the 25% tax bracket and estimate eligible healthcare expenses of $1,000 for the plan year. Your income tax savings by contributing to an FSA is $250 ($1,000 * 25%). If you only spend $800 of your $1,000 in the FSA during the year, you still save $50 ($800 - $750). By spending the entire $1,000, you end up saving the entire $250.
A quick Google search can retrieve several lists of eligible and non-eligible healthcare expenses. In general, you can plan on including any over-the-counter (OTC) medications, doctor visits copays, prescriptions, or other essential medical expenses. You can find a rather specific list here.
Today it is hard to find someone who does not own a cell phone. I admit I was slow in joining and got my first cell phone in 2005. Home phone services are also getting more sophisticated with plenty of features. I have met several people who have scrapped their home phone altogether since both husband and wife (and sometimes kids) have their own cell phone. This is obviously a great way to cut $20-$40 per month from your expenses depending on how much your home phone bill is. I, personally, cant' get myself to get rid of my home phone - primarily for potential emergency situations when the power is out and cell phone towers are overloaded or not functioning. We've seen this happen during many catastrophes in the past. I also ensure to keep at least one phone in the house that is not cordless. This ensures that at least one phone will work even when the power is out.
Even keeping home phone service, you can still trim some costs each month. You can pay for the basic line, which is usually only about $10/month and use your cell service for all your long distance. If you are used to caller ID at home, you can sign up for call forwarding (usually cheaper than caller ID) and have all your calls forwarded to your cell phone.
Many people subscribe to Internet service and/or TV cable with their phone service. Most providers will bundle these at a lower rate so you should also look into what packages are available and what promotions you can utilize. Revisiting your service plan at the end of a promotional period also typically results in more savings.