Sticking to a budget and making fiscally responsible decisions will help you save enough money for emergencies and retirement. Here are the top six things we should all know to maximize our savings potential.
1. Contribute the Max to Your Employer 401(k)
It's a good idea to contribute as much as you can afford to your 401(k) plan. Your 401(k) contributions reduce your taxable income since they are typically deducted from your income before taxes are assessed. This may be a good idea no matter how the market is doing since it's free money if your employer matches part of your contributions.
If you switch jobs, consider rolling your 401(k) into a fund you can self-direct. This gives you far more flexibility over your investments. If you are new to retirement savings, call the plan administrator for tips on how to manage your account.
2. Budget, Budget, Budget
The first step to having a plan you feel confident about is to create a detailed budget so that you can determine how much you spend and how much you can save. Include your after-tax salary at the top, then make a list of expenses. Some main categories to include in your budget are things such as rent/mortgage, groceries, utilities, phone, and transportation costs. You may wish to also add include things such as education, entertainment, and other items suited to your lifestyle. We know that many women like to also stay fashionable, so adding a separate line item for items like clothes/makeup/skincare can help you track those other items. Whatever is important to you, you should budget for.
Create an estimate if you aren't sure of the monthly expense and update it as needed based on your actual expenses. Having everything written down is a great way to look for future opportunities to cut back.
3. Build an Emergency Reserve
Put aside money in a rainy day account. Keeping this separate from your other funds helps you avoid the temptation to spend it on non-emergencies. Try to save three to six months' of salary in an easy-to-access account. This should include credit card debt and other expenses. You may decide to draw on this fund for emergency auto maintenance or a new cell phone if your current one is lost or stolen.
Paying upfront avoids interest on repayments for unexpected events.
4. Control Your Spending
According to Bloomberg, women drive up to 80 percent of consumer spending.1 New wage earners may struggle to use their paychecks wisely. You might want to avoid the temptation to overspend on assets such as a sexy new car. Just because you might "deserve" to drive around in a pristine luxury car doesn't mean you necessarily should financially.
5. Pay Down Your Debt
Excessive debt prevents you from reaching your optimal savings potential. This is especially true if you have high-interest credit cards. A recent National Debt Relief revealed that 63 percent of young women between the ages of 18 and 24 have credit card debt, compared to just 36 percent of men. Furthermore, 66 percent of women between the ages of 55 and 64 have credit card debt, which is twice as many as men in the same age bracket.2 Therefore, as a female is never a bad idea to rein in impulse spending and minimize your debt.
6. Put Your Money to Work
Once you have some money to invest, consider really putting it to work. Many young professionals choose a tax-free saving account for medium and long-term goals, such as a down payment on a home or a college fund for children.
Millennials face a number of challenges and opportunities when it comes to saving and budgeting. Making responsible decisions impacts their own lives and, according to statistics, drives the decisions made by their families in general.
This content is developed from sources believed to be providing accurate information, and provided by FP Guidance. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.