According to a CNBC, the median American household has only $11,700 put away in savings and retirement accounts. With supersavers on one end of the spectrum and those who save next to nothing on the other end, people tend to start saving money the older they get.
We can all use a little help on how to better stash away some money for a rainy day or retirement, although a lot of it boils down to discipline and fiscal responsibility. You need to have balance in your life and some fun along the way. Tax professionals can review these tips for their own use, as well as share them with their clients and bolster their role as trusted advisors.
Here’s a checklist of things you may need to save more money:
- An emergency fund for a job loss or illness.
- Down payment on a house.
- Money for the birth of a child, including a college fund.
- Money to start a business or charity, or to go back to school.
- Retirement/nest egg.
- Paying off debt to help free up overhead.
- A debt-free vacation.
Save your bonuses. Many companies offer variable compensation plans, featuring salaries coupled with bonuses, commissions and stock incentives, including employee stock purchase plans, restricted stock units and stock options. While it may be tempting to splurge on the latest technology or gadget, the smarter move might be to put the money, or a majority of it, away for savings, investment or retirement.
Capitalize on your extra paychecks. If you get paid every other week, there are two months out of the year when you will receive an extra paycheck. While tempting, try to avoid spending this money on today’s wants; instead, put the money into a savings account.
Save automatically through direct deposit. One way to force yourself to save money is by automatically depositing a small percentage of your income or an amount from your paycheck into a separate savings account. Another variation is to have your employer withhold money from your paycheck and apply it toward a 401(k) plan (see below). Check with your human resources department to see if your employer offers these options. There will be a slight adjustment period, but eventually, you won’t miss the money. Directly depositing a raise or bonus into a separate account offers a smoother transition.
Save your tax refund. The majority of taxpayers receive a tax refund (versus owing money); the average federal refund close to $3,000, mostly attributable to the earned income credit and an over-withholding cushion. Regarding the latter, clients can choose to get this money throughout the year by adjusting their withholding on Form W-4, Employee’s Withholding Allowance Certificate, but they seem to prefer the forced savings effect. The IRS and state agencies allow you to directly deposit your refund into up to three financial accounts. Direct deposit versus receiving a paper check is simple, safe and allows you to receive your money faster.
Direct deposit. This presents a great opportunity to start or add to your savings. You can divide your refund into additional financial accounts, including an individual retirement account (IRA) and a U.S. Series I Savings Bonds ($5,000 max). You can split your refund into more than one account by filing Form 8888, Allocation of Refund (Including Savings Bond Purchases).
Take advantage of your retirement plan and employer match. It’s very wise to start contributing to a retirement plan, such as a 401(k) or 403(b) plan, as soon as possible to ensure the longest-term impact with tax-deferred or tax-free growth. The tax-deferred type will lower your taxable income and tax liability. If your employer matches your contributions to any extent, this is money in the bank and adds to your nest egg. The most you can contribute to a 401(k) or 403(b) plan is $19,000 for 2019 ($25,000 if you’re age 50 or over).
If your employer doesn’t offer one of these plans, think about contributing to an IRA plan (or a simplified employee pension plan for the self-employed or small business owner). When saving for retirement, you may be eligible for the saver’s credit that carries a $1,000 max ($2,000 for joint filers).
Once you determine the amount or percentage you want to invest, you need to figure out the type of investment to choose. You can check with a financial planner to help you decide. Some employers may allow you to open an account only during an open enrollment period once a year, the start of a new job or during a major life event.
Improve your credit score. As you know, you need a good credit score to qualify for a loan to purchase a house or a car, and to be eligible for lower interest rates. Improving your credit score is not as hard as you think. You’re entitled to one free credit report per year, so be sure to find out where you stand. Some helpful tips include the following:
- Your credit score is adversely affected when your credit cards are maxed out, so try to keep your outstanding balances below 30 percent of the credit limit.
- If you have an outstanding debt that was erroneously reported or you truly didn’t forget to pay a bill, call the lender and request that the mistake be removed from your account.
- Be careful with making too many large purchases on credit because this will increase your debt-to-equity ratio. Lenders will run your credit report just before approving a new loan.
- Improve your payment history by paying bills on time. Your recent payment patterns will overshadow prior history.
Create a budget. Creating a budget and better managing your finances can ease anxiety. Here are some tips on establishing and following a budget:
- Calculate your after-tax monthly income.
- Document your living expenses, such as rent, mortgage, transportation, food and other items.
- Review your expenses to see where you can cut back.
- If you’re trying to save money, set a goal and save a certain amount each month.
- Think about following a 50/30/20 guideline that financial experts recommend, where you spend 50 percent of income on necessities (mortgage or car payment), 30 percent on personal expenses (a night out or vacation), and 20% toward retirement savings or an emergency fund.
Pass along these tips
There are important reasons everyone needs to save money, such as creating an emergency fund or retirement account. There are also numerous tips and tricks to help clients save more money to achieve their financial goals. Tax professionals can use the article as a checklist to help their clients uncover money-saving opportunities.
Editor’s note: This article first appeared on the Intuit® Tax Pro Center.