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It’s almost New Year’s Day, and that means, among many other things, that I will retire in about 6 months. And that brings us to the forgotten part of saving for retirement: having some cash savings outside of the tax-advantaged plans.
Why do you need cash savings?
Your 401(k), IRA and all those things are most likely invested in financial instruments such as stocks and bonds. And on this end of 2018, stocks have been beaten down and bonds confused a bit. So what you had last June isn’t what is there now. So some cash on hand allows you not to draw down on your retirement savings so much when they’re down.
Another thing it’s good for is limiting your taxes. Retirement income from all sources runs up a tax bill. If you have other income, it’s possible your Social Security can get at least partly taxed. So if you have an upcoming expense that you could pay out of your cash savings and not have to take more other income to pay for it, you won’t have as much exposure to taxes.
Cash savings come in handy for things that break down, too. And let’s face it, things eventually break. Sure, you could put the car repair on a credit card and pay it over time. I’d rather collect the points from that card and pay it off that month, saving the interest.
How to save cash from work.
Saving money can be easy if you exploit benefits at work. Take advantage of any way to put money aside every pay period straight out of your paycheck, and pay attention to goodies your employer offers.
Almost everybody can have direct deposit for their paychecks. But if you can have more than one direct deposit, have some money diverted to a savings account every payday. And whenever you get a raise, give your savings account a raise too. A friend of mine did and she has a robust savings account now.
Another trick is the 125 plan for medical and child care expenses. You choose how much you think you need to cover these things–copays, dressings, day care–and the company will divide it up over pay periods. For example, I took out $780 one year and it came to $30 a paycheck that I never even saw. Then, I saved receipts and put in a claim at the end of the year and got a check for $780. That went right into savings.
More savings opportunities at work.
Bonus checks? Savings. My company pays me 26 times a year, which means that twice a year I get paid three times a month, not two. That extra paycheck went right to savings. That takes effort, banking a paycheck or bonus, but it’s worth it when the car needs new tires or you’re putting by for hard times.
At my company we get a lot of vacation days, more than most people. It’s a nonprofit and they can’t really pay us a lot but our work is stressful. Thus, the extra vacation days. As an old-timer, I get six weeks a year allotted to me, but I never use it all, so it rolls over. I used to be unable to spend enough to keep up with the way it accrues, so I lost some.
And then the company said we could cash in some of the unused time so that we could collect another paycheck or two. Well, I signed right up for that and banked another extra paycheck by cashing in two weeks instead of losing it.
So a bit of advice: don’t sleep through the benefits presentation or bury your employee handbook. There’s gold inside.
More ways to grow your cash savings.
Once you have savings big enough, try getting better interest rates by laddering certificates of deposit. This trick is for savings you won’t need right away, NOT your emergency savings. Buy one CD for one year, one the same amount for two years, and one for three years. Then when one comes due, renew it if you don’t need it for something, and the other two will roll on. Keep them rolling over in succession and you’ll earn more interest than if the money just sat in a savings account.
With this going on, the money will not be available right away. But you can use it for long term or medium term goals.
Another way to fatten savings is, of course, to get another income to put away. Earn some extra money walking dogs, selling crafts, writing, or whatever, and put it away in the savings account.
If you are adventurous and want to try investing, start small with mutual funds or exchange-traded funds. What are those? They are ways that people with not a lot of money get to participate in the stock market. The American Association of Individual Investors is a great place to learn about investing. There are even local chapters if you want to learn by doing with other people. The AAII is a great resource for retirement planning too, because investing allows you to grow your savings much more than a savings account would.
Have more than one place for cash savings.
Putting together more than one savings account helps you stay out of debt, cover annual or seasonal expenses without straining your budget, and save for long term goals.
I have one account just for home repairs, because you never know when the water pump will go or the furnace will need fixing.
I have another account for things that come up annually. When we bought our house we didn’t get an escrow account for some reason. Instead, I started a savings account to build up enough money to pay for property tax and insurance bills. When we finally got a furnace, I added more money each month to prepay the winter fuel bill. I just figured out what I needed to save for these things and paid my account a twelfth of that amount every month.
My third account is to cover shortfalls in income, or car disasters, and to make me feel a little safer. It’s what I will use to shore up our income when times are bad with the retirement savings invested. You can make whatever accounts suit your circumstances and goals.
So now you have some ideas on the care and feeding of savings and how you can structure them to help you do what you want to do. Hope this helps, and have a Happy New Year!