Most financial experts will tell you the importance of saving for retirement, for college, and saving for a rainy day. All sounds good in theory, but how do you get there? After all, there’s the mortgage, bills, kids’ activities, and the list goes on and on. How do you get to the point where you can save for retirement, the kids’ college, and for a rainy day?
First you need to get to a starting point and begin laying out a plan. Your plan should not focus on saving for all major savings goals all in one shot, but instead should focus how you will cut back your spending over the next few months in order to start getting to your savings goals. If you try to figure out immediately how to save for everything, you will be overwhelmed with the whole idea of saving.
Most financial experts agree that the first major savings goal you should look to accomplish is maxing out your 401(k) contribution to meet your employers matching program. By putting a percentage of your paycheck into your 401(k), you have accomplished two tasks: lowered your taxable income and increased your pay from your employer.
By investing in your 401(k), you have lowered your taxable income by the percentage of savings you are deducting from your paycheck into your 401(k) account. All monies invested into a 401(k) are pre-taxed, so that 2% or 5% or 10% that you put into your 401(k) has decreased your taxable income by that amount.
Secondly, employers match up to a certain amount of your 401(k). Whether they match dollar-for-dollar, or 50% of the dollar up to a certain deduction amount, it is still additional pay your employer is giving you. Granted you will not get that money until at least 65 years of age, but it still increasing your pay and the money your employer is paying you.
At bare minimum, you should be investing into your 401(k) as much as your employer matches. If your employer matches dollar-for-dollar up to 4% of your investment, you need to figure out a way to invest 4% of your paycheck into your 401(k). If your employer s matching 50% of your investment up a certain percentage, say 6%, you again need to find a way to invest 6% of your pay. After all this is basically free money your employer is giving you to invest in your 401(k). You should figure out immediately what expense you need to cut back on to get that 401(k) match from your employer.
Once you have put yourself in position to save for your 401(k), you can begin looking at the next hurdle you need to save for.