Source: Bureau of Labor Statistics, Consumer Expenditures 2017, issued September 11, 2018
If you evaluate your own expenditures in these areas, you may see some good ways to cut costs. If you’re serious about building wealth, you must consider all of the potential ways to save.
Put “found money” straight into investments
From time to time, you may come across “found money.” When this happens, consider investing it.
For instance, maybe you just made the final payment on your car. Congratulations! That’s probably $200 to $400 that won’t be coming out of your pocket each month. Why not immediately set up an automatic deposit of that amount into a monthly investment plan? You’ve been getting by without that money in your budget before, so you should be able to continue to make ends meet even if you invest all of it each month.
Whether it’s a payment for a car, a washer and dryer, home equity loan, or any other monthly bill that you’ve finally cleared up, consider rechanneling that money to your investment account.
The same goes for all your other “found money.” Whether it’s a big raise, a small inheritance from your aunt, an unexpected tax refund, a winning lottery ticket, or a bonus from your company, resist the urge to spend it. Add it to your investment account and put that money to work for the long term. (See: Putting your windfall to work for the long term)
Save first, spend second
Once you’re confident that you can cut your expenses without missing your mortgage, set up a monthly investment plan in which money is automatically withdrawn from your bank account or paycheck.
There are several ways to set that up:
- Automatic investment account. You may want to set up an automatic investment plan that withdraws a set amount from your bank account each month to send to the investment of your choice. (See: Start building your nest egg with just $50 a month)
- 401(k) plan. If you work for a company that offers a 401(k) or other tax-favored retirement plan, contribute as much as possible to your plan. The money contributed to a 401(k) plan is deducted from your current gross income for tax purposes, thus typically reducing your income taxes in the years you contribute. Your investments within the plan can grow tax-deferred until you withdraw the money (typically after you retire and may be in a lower tax bracket). An added benefit at many firms is the company match, in which the company also makes an additional contribution equal to all of or part of your contribution to the plan.
- Self-employed retirement plan. If you work for yourself or own your own small business, there are other ways to start building your nest egg with a tax-deferred retirement plan, including a “Simplified Employee Pension” (SEP) IRA that may allow you to contribute a portion of your earnings each year to a tax-deferred account. If you’re self-employed, see: If you’re self-employed you can still benefit from a tax-deferred retirement plan.
- Open an IRA. You may be able to take advantage of tax-deferred investing by opening an Individual Retirement Account (IRA). You may contribute up to $6,000 per year for 2020 and 2021, depending on your earned income (or $7,000 if you’re 50 or older) to either a traditional IRA or a Roth IRA. For more, see: Don't miss the tax and savings benefits of an IRA.
Even if you’re just making ends meet, you can probably find a way to start building wealth through an investment plan. It may take discipline and sacrifice, but over the long run, you’ll be happy you started finding ways to save your money instead of finding ways to spend it. (See: What’s holding you back? Investing may be easier than you thought)