4 Ways To Stretch Your Paycheck and Finally Start Saving
You know you need to save money, but it can be hard if you're already trying to make ends meet on a small income. After all, you have bills to pay today, so it's hard to make saving for tomorrow a priority.
Even higher-income individuals can find themselves living paycheck to paycheck without much room in their budget to set aside cash. "Most people don't start saving for retirement or short-term goals because they think they don't have enough money," said Brandon Hayes, managing director and private CFO at the financial planning firm oXYGen Financial. But that couldn't be further from the truth, he said.
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Despite what you might think, it is possible to save even when you're strapped for cash. Even a small amount is better than nothing, Hayes said. Here's how to get started.
1. Figure Out Where Your Money Is Going
You might have more room in your budget to set aside money for savings than you think. But you won't know until you track your spending for at least one month.
"Having this knowledge is crucial to finding ways to stretch your current income," said Dominique J. Henderson, Sr., owner of financial planning firm DJH Capital Management. "You have to understand where every dollar is going."
Review your bank statement to figure out how much your necessary expenses -- rent or mortgage, utilities, insurance, transportation and food -- are costing you. Account for credit cards, student loans and other debt payments. Then, add up how much you're spending on things you can live without, such as cable TV or Netflix, restaurant meals, magazine subscriptions and nights out.
Knowing how much of your paycheck is going toward needs and wants will help you pinpoint how much you can afford to save each month.
2. Pay Yourself First
You should think of saving as one of your fixed expenses that you pay at the beginning of the month rather than waiting until the end of the month to see how much you have left over to set aside. Pay yourself first, then learn to live on what's left.
One of the best ways to pay yourself first is to automate contributions to savings so you don't even have to think about setting the money aside. If you opted out of your workplace retirement account because you didn't want to sacrifice any of your small paycheck, you need to opt back in and have contributions automatically withdrawn from your paycheck each month.
You also need to be saving for emergencies so you don't have to rely on credit cards or even retirement savings to cover unexpected costs. To build an emergency fund, use the same approach as with retirement savings by setting up automatic monthly transfers from your checking account to a savings account so the money comes out before you have a chance to spend it.
"A good rule of thumb is to place 10% of each paycheck into savings," Hayes said.
Don't get discouraged if you can't set aside that much now. Even a small monthly contribution can add up to $1 million for retirement if you start saving at a young age because your money will have more time to grow.
3. Get Free Money for Your Retirement Account
If you can't set aside 10% of your pay each month, contribute enough to your workplace retirement plan to get the full matching contribution from your employer -- if it offers one -- because this is practically free money. The most common type of match is 50 cents for every $1 contributed by an employee up to a certain percentage of pay -- typically 6%, reported 401kHelpCenter.com.
However, 25% of employees don't contribute enough to get the full match from their employer, leaving an estimated $1,366 of free money on the table each year, according to research by Financial Engines, an investment advice company.
4. Keep More of Your Paycheck
A tax refund can be a welcome windfall when you're living paycheck to paycheck. But a refund means you're letting the IRS hang onto too much of your paycheck throughout the year. "Your tax refund represents an interest-free loan to the government," Henderson said.
You can keep more of your money each month -- and use it to boost savings -- by adjusting your tax withholding. Ask your human resources department at work for a new W-4 to claim more allowances, which will lower the amount of taxes withheld from your paycheck. You can use the IRS Withholding Calculator to figure out how many allowances to claim so you don't have too much or too little withheld from your paycheck.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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