If the idea of saving money while you are living paycheck to paycheck makes you nauseous, keep reading. There are things that you can do to start saving money for your future right now. If you are looking for ways to build your personal wealth or prepare for retirement, these same tips can help you reach or exceed your financial goals. In both cases, speak with a personal tax accountant for personalized recommendations based on your goals, expenses, and income.
A Budget is Your Ally!
Budgeting is not a dirty word – in fact, a well-devised budget gives you more freedom and reduces stress. Start by listing all of your current expenses, including rent or mortgage, utilities, entertainment, phone and cable, credit card payments, fuel, food, and clothing, and everything else you are spending each month. Now, analyze all sources of income. Hopefully, your income is greater than your expenses.
Let’s say you bring home $5,000 each month and your expenses are $4,500 each month. The first step is to go carefully through your expenses and see where you can shave $250 off your expenses. Perhaps downgrading to a lower cable package will save $50, going out to eat one less time per month will save an additional $50. Now you only need to find another $100 to deduct from your budget. Instead of $4,500 in expenses, you are down to $4,250; that $250 is the 5% recommended for savings.
Generally speaking, financial professionals recommend that you save between 5% and 10% of your net salary each month for the best results; the scenario above shows how you can accomplish the 5% level. Remember, in addition to savings and investment funds, it is recommended that you build an emergency contingency fund that represents 4-6 months of living expenses in the event of an emergency.
401(k) – Feed it.
If your employer offers a 401(k) matching contribution, take full advantage. After all, this is essentially free money. Most matching plans provide a 50% match of up to 6% of your salary. So, if you make $35,000 annually and you contribute 6% of your salary or $2,100, your employer will put an additional $1,050 into your savings account. Remember, the $2,100 is taken pre-tax, meaning it lowers your tax bill, making it advantageous now and in the future. 401(k)s defer taxes on your income until you reach retirement and withdraw your funds.
Flexible Spending Accounts
Flexible spending accounts (FSA) are a great way to lower your tax burden; like the 401(k) contributions, the money deposited into the FSA is considered pre-tax. What can you use your FSA for? Medical expenses including deductibles, prescription medications, glasses and contacts, treatments, co-pays, drug rehab treatment, medical equipment, birth control and even acupuncture. It is important to determine carefully what expenses you have annually as the money in an FSA does not roll over into the following year.
Start saving your hard earned money today. Create a livable budget that includes a contribution to a savings account or 401(k). And before you know it, you may have enough saved up to buy a vacation income property.
