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20 Easy Ways to Save Money Every Day

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We all know it is easier to spend money than to save them. Spending money often gives us emotional comfort and became a habit. But changing your spending habits and finding new ways to save money can be a great thing for your financial life.

Learning how to save money can help you to reach your financial goals:

  • to buy a house
  • to pay off debt
  • to save for a vacation
  • put more money in your emergency fund
  • to save for retirement
  • to save for kid’s education

No matter what your financial goals are, this post has money-saving ideas for everyone. Start with a few of these suggestions and see if they work for you.

Here are 20 of my favorite ways to save money every day:

How to Save Money Through Money Management:

1). Pay your bills online.

There are many benefits of paying your bills online. I personally do not remember the last time I mailed off a check to pay our bills. By going online, you will not be using envelopes, stamps, and checks as much as it was popular in the past. Automation helps to save money and time and reduce the stress of money management.

We pay all our bills automatically. Our online payment is set up with a local bank and bills are paid out of our checking account. I just have to make sure I added money to that account before the bills are due. Even though I keep an eye on all our transactions, but I never have to worry about being late on bill payments.

Related Post: 9 Ways to Organize and Simplify Your Finances

2). Consolidate your credit cards debt.

Debt can be a very terrifying issue. When you face thousands of dollars in credit cards debt you do not have enough money to save for retirement or to pay off your mortgage more quickly.

You can save a lot of money and reduce your monthly payments by consolidating your credit cards debt. If you own several credit cards try to consolidate your debt into a single credit card with a lower percentage rate. It will help to reduce interest costs and make your monthly payments more manageable.

table-paper - easy ways to save money

One of the best ways to consolidate your debt:

  • Refinance with a balance transfer credit card
  • Consolidate it with a personal loan

3). Get cash back when you shop online.

For many of us, it has become so convenient to shop online regularly. That is why we need to turn it to our advantage and learn how to get paid while shopping online. You can sign up for websites like Ebates, Ibotta, Rakuten, and Swagbucks to take advantage of cash-back rewards. All these websites are free to join and easy to use.

If you want to learn how to earn cash back, save money on groceries and travel, I recommend reading the article by Michelle from Making Sense of Cents:

Best Rewards Credit Cards for 2021 – What You Need to Know

4). Negotiate credit card rates.

If you are losing money by paying a lot of interest on your credit cards you should negotiate your current interest rate with your credit card company. It is important to remember that you have some power to negotiate your current interest rate as long as you have been making payments regularly. Call your credit card company and ask for an interest rate reduction.

5). Transfer your credit card balance.

If you cannot reduce your credit card interest rate, try to transfer your credit card balances to 0 percent APR card. Transferring your balances will help you save hundreds of dollars in interest over time.

The Best Zero Percent Interest Credit Cards

6). Move your money into a high-yield savings account.

Most people have their savings stashed in a local bank with a very low-interest rate. The primary reason for that is because it is convenient and close to their homes. Unfortunately, your money will not grow fast over time with low-interest rates.

You can do a lot better by moving your money into a high-yield savings account. Find online banks that are paying interest rates higher than your bank and keep your savings there.

Check out the Best High-Yield Savings Accounts and start earning higher interest right now.

7). Refinance your mortgage

You can save a lot of money by refinancing your mortgage to a lower interest rate. With a lower interest rate, you can get lower monthly payments. And once you reach 20 percent equity you can eliminate PMI – private mortgage insurance.

Refinance rates from Wells Fargo

How to Save Money Shopping:

The next time you are going shopping make sure to apply these money-saving ideas:

8). Stick to your shopping list.

One of the easiest ways to save money is to stick to your shopping list. Do not go shopping if you do not have a shopping list. Creating a list is a great way to make sure you will purchase only what you need. Otherwise, you might go on impulse shopping and spend more money than you have planned.

Stay away from email marketing and do not subscribe to emails from your favorite retail stores. Avoid the chances of spending more money on things you do not need.

9). Stop going to the Mall.

Retail marketing is all around us and it is hard to fight the temptation to shop for new clothes. That is why if you want to save money you should stop going clothes shopping so often. As I said before you should have a plan and shop only for what you need. And stick to your shopping list!

10). Do holiday shopping right after the holidays.

One of the best ways to save money on shopping is to do your holiday shopping after the holidays. After the holidays, the prices go down drastically, sometimes up to 75 percent lower. I often buy party supplies, decorations, wrapping paper, and even gifts a few days after the holiday passes.

11). Clean your closets.

If you have an urge to buy new clothes often, I recommend going through all your closets and see what you might find. Make an inventory of your clothes. Have a yard sale or use craigslist to sell clothes buried in your closet for years.

Another useful trick is to take the clothes from the back of your closet and bring them to the front. After cleaning your closets, you might find your wardrobe looks completely different and you do not need to spend money on clothes right now.

How to Save Money on Food:

Learning how to save money on food and groceries does not have to be complicated.

12). You can save money on food by:

  • Prepare some meals at home
  • Cook from scratch
  • Get a crockpot
  • Brown bag your lunch
  • Invite friends over instead of going out
  • Share meals when eating out

13). You can save more money on groceries if you choose to:

  • Skip the bottled water and soda
  • Buy in-season groceries
  • Plan your meals around your grocery store’s sale
  • Start a vegetable garden

How to Save Money on Entertainment and Vacations:

If you are planning a road trip or vacation, there are lots of money-saving ideas. Here are a few of my favorite ones:

14). Check out free events in town.

Our town has several wonderful parks, lakes, trails, free tennis courts, and more. Everyone can have fun playing outdoors, hiking on trails, walking around the lakes, or trying any sports activities. And it is all there for free.

Most towns schedule many free events. You can save a lot of money if you want to get free entertainment and free food. What you need to do is just look at your community calendar. Stop by the local town hall or library and ask how to get a list of upcoming community events. I always check out our town’s website to keep in touch with what is going on around us.

15). Pack food for road trips.

If you want to get out of town, take some time to pack meals and snacks for your road trip. Thus, instead of stopping in the middle of the trip and driving around looking for a place to eat, you can just eat on a road. Even better if you can stop at a nice park and have a picnic there. This way you will have fun and save money. Travel service plazas and fast-food chains are conveniently located right off the highways and always expensive, so you better off avoiding them if possible.

16). Use Airbnb when traveling.

For the past decade, Airbnb became hugely popular among travelers as a cheaper alternative to hotels. Vacations are always expensive. The next time you plan on taking a trip, check out to see and compare prices for Airbnb vs hotels. You can save a lot of money by renting an entire house to yourself for a fraction of the hotel cost.

Stay at Airbnb

17). Use Booking.com for travel deals.

Booking.com is one of the best websites in the online booking world.

city of Rome - save money on travel expenses

We like to travel and use this website all the time for booking our hotels because you can find some incredible deals. If we stay at the hotel, we always try to find one with breakfast included in the price. I love hotel breakfast especially when they offer regional specialties. With breakfast included we do not need to start our day trying to find a place to eat and we can take a bagel or pastry and some fruit for our lunch later.

Use Booking.com for last-minute deals

18). Use your AAA discount.

If you are an AAA member you can save a lot of money by using your AAA discounts. AAA travel agency has money-saving offers from cruise vacation packages and hotel discounts to car rental deals. To save more money use your membership card to get a discount anywhere you can.

Use AAA for your travels

How to Save Money at Home and on Services:

There are many ways to save money at home and on services. These tips will help you minimize your household expenses significantly.

19). You can save money at home if you want to:

  • Try to fix things yourself. You can learn anything you want from YouTube.
  • Turn off the lights every time you leave the house or the room.
  • Install energy-efficient light bulbs. Swapping just your 4 or 5 most used light bulbs for LEDs can save you $50 or more a year.
  • Rent out unused space in your home.
  • Cut your lawn.
  • Look for a cheaper place to live.

20) You can save money on services if you choose to:

  • Get rid of some of your subscription services (meal deliveries, streaming services, etc.)
  • Cancel unused gym memberships.
  • Cancel the cable or satellite channels you do not watch. Switch to low-cost cable alternatives such as Netflix, Amazon Prime Video, or Hulu.
  • Get rid of your home phone and switch to cell phone plans.

Final Words

We all know that trying to find easy ways to save money can be tough. We have been there before. There are times you feel that you are not making much progress even you have tried everything. However, if you are prepared to sacrifice now and learn about the best ways to save money every day you can reach your financial goals a lot faster.

What are your favorite ways to save money? Share your thoughts and ideas with us in the comments below.

Remember to share this post if it helped you!

9 Ways to Organize and Simplify Your Finances

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The modern lifestyle can be very chaotic and stressful. It is no wonder we are overwhelmed by our busy schedules, family responsibilities, and finances.

Money management can be complicated on all levels. Everything from budgeting, retirement planning, savings, investing, debt, and even types of insurance needed to be organized and managed.

I do not know about you, but I have found that often enough finances are in control of my life. I get overwhelmed with so many parts needed to be managed to keep my money goals on target.

Fortunately, there are many ways to manage money without getting overwhelmed. Learning how to organize and simplify finances eventually will help you stress less about money and focus on what is important in your life.

If you feel that your financial life is out of control, I encourage you to try one or two ways to organize and simplify your finances.

1. Organize financial paperwork.

It is hard to simplify your finances when you do not know where to find your financial papers at the last minute. And in case something happens to you does your family know where to find your important documents?

That is why the key to keeping your finances simple is to keep them organized in one place.

Collect all your bank statements, bills, legal documents, mail and set up a filing system in a way it suits you. The filing system should be simple and yet effective to keep track of your financial papers. I keep all my papers in simple manila folders and hanging file folders inside a 3-drawer file cabinet. All papers are divided into categories:

  • Expenses
  • Credit cards
  • Banking
  • Medical
  • Insurance
  • Investments
  • Tax returns
  • Miscellaneous

Once a year I go through all folders and get rid of everything I do not need anymore.

2. Track all financial accounts in one place.

It is hard to keep a track of everything you own if you do not have a system. If you want to simplify your finances, you should create a list of everything you own. Seeing all your financial information in one place will help you get a big picture.

Start the process by gathering your financial information in one place. This way you will see all your expenses, assets, debts, and liabilities at glance. Whether you want to list them down in a traditional ‘pen and paper style’ or create an Excel spreadsheet, call it “an inventory of your accounts”.

You can also do it with a personal finance app like Mint. This popular free online financial tool allows you to link all your accounts to get a real-time view of your financial life in one place. Also, this app helps you pay bills in one place, gives you updates on your payments, gets reminders on your due dates.

I personally use a combination of Mint and Excel spreadsheet and it works well for us.

MINT

3. Consolidate your accounts.

One of the easiest ways to simplify your finances is to consolidate your accounts. Many people still like to have multiple savings and checking accounts and keep money in several different banks. In addition to that, you may also have a mortgage, retirement and investment accounts, and insurance products. It is a lot to juggle.

I believe it makes your financial life is complicated. If you want to simplify your finances, you should keep your accounts to a minimum.

I even recommend closing your old accounts including your old retirement accounts. If you changed your jobs a few times, you might still have your 401(k) money with previous employers. And if you forget to roll over this money to your IRA or Roth IRA, you may even forget to track thousands of dollars invested in old retirement accounts.

Related articles:

Save yourself the headache of dealing with multiple savings and checking accounts by closing those that are not useful and consolidate them in one bank account. If you have fewer accounts to track, it means you have less hassle remembering logins, websites, and tracking your money.

4. Pay your bills automatically.

If you hate keeping old receipts and bank statements, you should take advantage of automation and go paperless. I personally do not remember the last time I mailed off a check to pay our bills.

table-globus-smartphone-organize your finances

There are many benefits of paying your bills online including convenience and security. By going online, you will not be using envelopes, stamps, and checks as much as it was popular in the past. Moreover, it will be easier to track your payments using a lot of tools like reports and alerts when you sign up with an online service. The best part of automation is to reduce the stress of money management and make it less complicated.

All our family bills are set up to be paid automatically out of our checking account. I just have to make sure I added money to that account before the bills are due. Even though I keep an eye on all our transactions, but I never have to worry about being late on bill payments.

5. Automate your savings.

Another great way to simplify your finances is to automate your savings. Learning how to automate your savings will help you stress less and save more. Every time we receive our paychecks, a lump of it automatically is going into our retirement accounts. Another portion of our income is deposited into our savings account and then the rest is going into our checking account.

We use our savings account for keeping our emergency fund money, and funds for future travels. The checking account is where we keep the money for our monthly bills and living expenses. I like to know that our income gets distributed in a few simple accounts. By automating it, I always know I am going to be saving a certain portion of our income each month.

Another great thing I like about automating our savings is that even a small amount of money will grow up over time. I started with a $50 automatic transfer from checking to savings account once a month, then increased it to twice a month. The automation really helped to raise our travel fund from $1,000 to $8,000.

6. Simplify your investments.

The simplest way to invest your money is through index funds. Index funds are low-cost and low-risk investments because they follow the market indexes. But you still have to deal with asset allocation and portfolio rebalancing.

If you are a new investor who likes hands-off investing experience, try using Robo-advisors.

I recommend checking out Betterment as a Robo-advisor.

Robo-advisors are known as online advisors or automated investing services. Robo-advisors are much cheaper than a human financial advisor. These online services make it easier for you to start working on your financial goals. You will get help with your investments at a low cost and with low account minimums.

If you want to learn more about Robo-advisors, I recommend reading What is Robo-Advisor and How Do They Work from Balance.

7. Pay down debt.

Carrying debt on a few credit cards makes your financial life stressful. When you face thousands of dollars in credit card debt you do not have enough money to save for retirement or to pay off your mortgage more quickly.

Set your financial goal to get rid of high-interest debt as quickly as possible. You can use recommended debt snowball or debt avalanche strategies to pay down your debt.

Related Post: How to Pay off Debt?

You can also reduce your monthly payments by consolidating your credit card debt. Consolidating a number of your credit card debt into a single one may be a good idea if the new debt has a lower percentage rate than your credit cards. It will help to reduce interest costs and make your monthly payments more manageable. One of the best ways to consolidate your debt:

  • Refinance with a balance transfer credit card
  • Consolidate it with a personal loan
blue credit card-debt-simplify finances

However, it will depend on your credit score and how much debt you have accumulated.

8. Package all services in one place.

Consolidating your expenses in one or two places is another way to simplify your finances and save some money.

Many companies produce and supply multiple products and services. They sell these products or services separately or in packages or bundles, at a “bundle price”. As a result, you can buy them together as a package at a lower price than what you would pay for them individually.

You can bundle together services like your internet, cable TV, and cell phone. You can also package together with all your insurance needs with one company such as homeowner and car insurance.

The best part is that you can save money by getting a discount from your provider for combining two or more services on one bill. And you can reduce the number of bills to pay each month from several to just one.

9. Reduce the number of your credit cards.

Another way to simplify your finances is to get rid of numerous credit cards.

Once, we used to have nine credit cards and it was way too complicated to keep track of our spending. We used credit cards for promotional money transfers, to earn cash back, and other rewards. At some point, it became a nightmare to pay off those balances.

Eventually, we trimmed down the number of our credit cards to just a few. We prefer to use credit cards with no annual fee and cashback rewards. And we do not worry about high interest rates because we always pay the balance off in full each month.

Best Credit Cards Comparison by Forbes

Final Words

If you want to simplify your finances, it does not have to be complicated. Just making small changes as I have described in this post can make a huge difference in your relationship with money.

Do you feel frustrated dealing with your finances? How do you simplify your finances?

Remember to share this post if it helped you!

Planning for Retirement in Your 50s

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We have heard so many times that the sooner you start saving for retirement the better off you will be in your old age. But when you are in your 20s and 30s you are not in a rush to save for retirement. It is easy to fall into a trap thinking you have plenty of time to do that later. Suddenly, you are in your 50s and have not saved enough for your golden years.

Life has presented you with some challenges. You were busy with kids, saving for their education, straightening out debts, and trying to pay off a home mortgage. In the end, there was never that much money left. But do not despair, because it is not too late. If you are in your 50’s and fell behind on your retirement goals, there are things you can do to boost your retirement savings.

Use these smart steps to find out how to catch up on planning for retirement in your 50s.

1. Retirement projection

Start with figuring out how much money you will need to retire. First, find out how much income you will need to cover your retirement expenses.

Financial experts suggest that you need about 80 percent of your pre-retirement income to maintain the same standard of living in retirement.

Suppose my current annual income is $70,000. Multiply that number by 80 percent ($70,000 X 0.8 = $56,000). So, I will need around $56,000 in retirement to live the way I do today. And if I have expensive hobbies like traveling, I will need a higher number.

Next, figure out how much income you will receive from Social Security. You can contact the Social Security Administration to find out how much will be your benefits at age 62, full retirement age, and at 70. For today, I use the estimated average Social Security retirement benefit in 2021 which is $1,543 a month or $18,516 a year.

Then, subtract your Social Security income from your projected retirement income and you will see how much you need to provide from your savings. $56,000 – $18,516 = $37,484 a year.

So, in our simple case, I will need $37,484 in annual income to cover the income gap. The money to cover that gap should come from 401(k), IRA, Roth IRA, and other retirement savings.

5 Easy Steps to Calculate Retirement Income Gap

Also, you can use an online retirement calculator for retirement projection. Take a few minutes to enter your personal information, see the numbers, and where you stand today.

AARP Online Retirement Calculator

But I think the best way to find out how much money you need to retire is to create a retirement budget based on your current and future expenses. You might have a general idea of what you spend now. But you will be better prepared if you have a clear picture of your expenses today and how that might change in the future.

If you do not know how to create a retirement budget or organize your finances for retirement, I recommend reading my posts:

2. Minimize your debt.

When you are in your 50s make it a goal to pay off your credit card debt, student loans, car loans, and any personal loans before your retirement date. Do everything you can to retire debt-free and even pay off your mortgage if possible.

When you stop working and start living on a fixed income you will need to stretch those retirement dollars as far as you can. How can you enjoy your retirement if you must spend a portion of your retirement income to make a mortgage or debt payments each month?

Credit cards

If you are carrying a high-rate credit card debt you are putting a lot of pressure on your finances. Those high-interest payments can eat away your ability to save. I recommend working on a debt payoff plan if you have more than one credit card.

There are two most popular debt payment strategies – the snowball method and the avalanche method.

The snowball strategy works by paying off the credit card with the smallest balance and then working your way up until all credit card debt is settled.

The avalanche strategy allows you to pay off your highest interest rate debt first and then work it down. I recommend focusing on your highest-interest debt first because the longer it takes you to pay it off, the more money you will pay towards interest.

And if you can help it, do not add any more debt to the pile while paying off old debt.

How to Pay off Debt Before Retirement

Mortgage

If you still making mortgage payments now it is time to figure out how to pay it off in full before you retire. You do not want to carry that financial burden while living on a fixed income. Look at your mortgage balance and try to figure out how much extra you can put toward your mortgage each month. Those extra payments can reduce your principal balance significantly.

Also, instead of sticking with the traditional monthly payments, you can start making bi-weekly mortgage payments. The whole idea of paying off your home loan earlier will help you eliminate debt faster and start saving more for retirement. In addition to that look into refinancing your mortgage to get a lower rate and to reduce your monthly payments.

When you plan for retirement in your 50s, getting out of debt should be your first priority. At this age, you have to make the most of your working years and build or increase your nest egg within the next 10 to 15 years.

3. Maximize your retirement savings.

Being in your 50s is an ideal time to look at your retirement plans and financial goals. You are close enough to retirement to have a realistic idea of how you want to spend your golden years. Yet you are far away to tweak your financial goals.

charts-laptop-plan for retirement in your 50s

The closer you are to retirement, the less time you have for compound interest to kick in and start working its magic. That is why the ultimate goal in your 50s is to stash as much money as possible in your retirement savings.

Whenever possible, increase your retirement contributions up to the maximum allowed in retirement plans such as 401(k), IRA, and Roth IRA. The best advice is to start spending less so you can put more money into your retirement savings.

The 2021 contribution limits are:

  • $19,500 for 401(k) retirement plans. And if you are age 50 or older, the catch-up contribution is an additional $6,500. So, you can save a total of $26,000.
  • $6,000 combined contribution for traditional IRA and Roth IRA. And the catch-up contribution for people age 50 or older is $1,000. So, you can save up to $7,000 with your pre-tax money (IRA) and after-tax money (Roth IRA).

When you are getting closer to retirement, maximizing your traditional 401(k) and IRA accounts is important but not always enough. While you are still working you can make it a priority to save even more money in your Roth IRA account, emergency fund, and may be taxable investment funds if possible.

A Guide to Understanding a 401(k) Plan

Another way to increase your retirement savings is to work longer. The goal is to make the most of your working years. You need to maximize the time you have left. Earning an income for a few more years could improve your financial security in retirement.

4. Spend less and save more for retirement.

I am sure you may not like to hear this, but the fastest way to save more money for retirement is to cut your expenses. If you start practicing how to curb your spending and live on less money today, it will make your life easier in retirement.

Many people in their 50s enjoy the peak of their salaries. The kids are gone, parents become an empty nesters and start spending more on luxuries. It is easy to get used to a luxurious lifestyle. However, it will be tricky to save money and even to retire if you let your spending get out of control. After all, the less you spend the more you save.

15 Ways to Live on Less in Retirement

5. Think about where to live in retirement.

When you are only 10 to 15 years from retirement, you need to think about where you will live because it will affect your living expenses.

houses on lake and mountains -where to live in retirement

Housing is expensive. We all know that it takes a big chunk of our income to pay for property taxes, homeowner insurance, utilities, maintenance, and mortgage. Even with no mortgage payments, housing will be your biggest expense in retirement and it may eat up a big chunk of your retirement income.

I am sure you live in a lovely home. And I know that you love your home and have a lot of great memories of raising your family there. But if it is in a high cost of living neighborhood and expensive to maintain, you need to downsize and move to a place where you can afford it. Otherwise, you will run out of money fast.

There are a couple of housing options to consider before you retire:

  • Sell your big house in an expensive location and move to a smaller house or condo in a low-tax state. In this case, your living expenses will be reduced, and you might have some extra income to pay for things you love to do in retirement.
  • Stay in your town but move to a smaller home or condo. Having a smaller place to maintain will cost you less money.
  • Sell your house and rent an apartment in a big city. But if you want to live closer to the museums, art galleries, concerts, and festivals you should be financially prepared to spend more money because retiring in a booming metropolis can be pricey.

If you want to learn more about housing options, relocating, and downsizing I recommend reading my posts:

6. Protect yourself and those you love.

Planning for retirement in your 50s when retirement is on the horizon, make sure you have insurance plans in place to protect yourself and your family. Have you thought about how to protect yourself as you age and how to help your family care for you if you need it? When the time comes that you need assistance who will manage your finances, your medical care, and your regular day-to-day life?

young and old women in a park-healthcare in retirement

I understand that these are difficult topics to discuss. But it is a part of reality to grow old. And if you love your family you will plan for it. So your loved ones will not struggle and may have to scramble to care for you.

I write often in my articles about the cost of medical expenses in retirement. I want to remind my readers that healthcare is the second biggest expense in retirement after housing and you need to plan for it. Medicare is not free. It does not cover all your medical expenses and does not pay for long-term care.

Long-term care insurance is the most recommended way of planning for future expenses. It will cover nursing homes, assisted living facilities, and in-home care. It will help you not to be a financial burden on your family if that time comes. And you do not want to leave your husband or wife with nothing because the entire nest egg was used up taking care of you.

Putting It All Together

You are in your 50s and feeling the urgency of doing everything you can to have financial security in retirement. If you are behind on your savings and might be feeling the pressure, I want to remind you that it is never too late to start planning and saving for retirement.

The longer you put off dealing with your financial situation, the farther away you will be from your retirement dreams. So, do not delay planning for your next phase of life and take the first step today!

Related Article: Retirement Planning in 5 Simple Steps

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A Guide to Understanding a 401(k) Plan

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a couple in bed dreaming of retirement -a guide to 401k plan

No one needs to remind you that you should save for retirement. After all, no matter your age and how far away your retirement is, you want to enjoy your golden years without having to worry about money.

In the past, many employees could depend on a traditional pension from their employer. But that was then. With traditional pensions becoming a rarity, we are pressured to do the heavy lifting of saving for retirement on our own. Although the word ‘401k’ is synonymous with retirement planning, how many of us know and understand all the rules of a 401k plan?

Here is a guide to understanding a 401(k) plan:

What is a 401k and why enroll in a 401k plan?

The 401k plans are retirement plans offered by employers. And a 401k account is tied to your employer because the employer sponsors the plan. A 401k is just the name of your retirement savings account where you save money for retirement.

A 401k account is a tax-deferred retirement account. It allows you as an employee to set aside a percentage of your pre-tax earned income to a retirement account.

When you set aside your pre-tax money you avoid paying taxes on that income today and allow those contributions to grow tax-free until retirement. But when you retire and start withdrawing money from your 401k account you will have to pay taxes on your withdrawals.

Why enroll in a 401k plan?

The best benefit of the plan is to reduce paying taxes today and allow your contributions to grow tax-free for a long time.

However, you cannot avoid paying taxes entirely. You will pay income tax on any money you withdraw from your 401k when you retire.

How to open a 401k account?

Opening a 401k account is pretty simple. You can open an account when you do your paperwork as a new employee. However, you are not required to start the 401k when you are first hired. It can happen at any time. You just need to fill out the paperwork and decide how much of your paycheck will be going into that account. Your contributions will be automatically deducted from your paycheck.

How much can you contribute to a 401k plan?

Retirement savings accounts are regulated by the IRS. That means the IRS sets the rules as who can use a 401k plan, and how much they can contribute. The amount you decide to contribute to your 401k is up to you. However, the IRS regulates the contribution limits every year.

The 2021 maximum 401k contribution:

  • The 401k contribution limit is $19,500. But if you are age 50 or older, the catch-up contribution limit is an additional $6,500. So, you can save a total of $26,000.

Whenever possible, increase your retirement contributions up to the maximum allowed in your retirement plan. If you are a few years away from retirement, being short on retirement savings can be problematic.

The benefits of a 401k plan.

There are many tax advantages of saving money to a 401k plan.

First, the contributions you make to your 401k are tax-deductible. That means you do not pay taxes on the money you put into your account.

Your 401k contributions will be deducted from your gross income which will reduce your taxable income for that year. For example, if you made $75,000 and contributed $15,000 to your 401k, you would be only paying taxes on $60,000.

Next, your employer may match your contributions. The employer match means that your employer agrees to match a portion of your money going into the 401k account. Usually, the employer match is between 3 to 6 percent.

For example, your employer offers to match 50 percent on up to the first 6 percent you choose to contribute. So, if you make $75,000 a year and choose to contribute 6 percent of your annual salary ($75,000 x 0.06 = $4,5000), your employer will contribute an additional 50 percent of that amount. That free $2,250 ($4,500 : 2) will steadily grow over time.

If you do not put money into a 401k, there is no match. If your employer offers to match your contributions, I suggest at least save as much as the match. That is free money. In the end, you will be earning extra money for doing absolutely nothing.

Lastly, the money inside your 401k account grows tax deferred. If you open an investment account, you will have to pay taxes on your capital gains and dividends every year. But in a 401k plan, your money grows tax-free as long as it stays in the plan. And thanks to the power of compounding, your retirement savings will be growing faster over the years.

Related Post: Why Do You Need to Max Out Your 401(k)?

How to invest your 401k money?

Most 401k plans offer a limited number of investment choices. Your 401k is tied to your employment. When you sign up for a 401k plan, you have to choose from the investments offered by your employer’s plan.

Most 401k plans typically allow you to choose from a small number of pre-selected mutual funds that vary from conservative to aggressive. Some mutual funds are index funds, which track major market indexes. And other funds are target-date funds, which select a mix of investments appropriate for your age, but the fees can be very high.

Investing in index funds or target-date funds present less risk for you as an investor, than investing in individual stocks. But you need to understand which funds are best suited for your retirement goals, your age, and your risk tolerance.

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What to do with 401k when you change jobs?

When you change jobs, you have a couple of options:

Leave 401k with your old employer

people at the table- 401k investments

Your first option is to do nothing and leave it with your old employer. If you like the investment options and costs offered by the plan administrator, your money will continue to grow in that 401k account.

But the biggest drawback to this option is that you can no longer contribute. To keep investing, you will have to open a 401k with your new employer. That means you will be juggling multiple statements and accounts every month.

Rollover old 401k to new 401k

Your second option will be to carry out a 401k rollover. A 401k rollover means you transfer your funds from the old 401k to your new employer’s 401k plan.

The rollover makes sense if you do not want to leave money with your former employer’s 401k, or simply want all your money in one account. That way, you will have more control over your contributions, and both of your accounts will be consolidated. Your new 401k plan administrator should help with transferring the funds.

Rollover 401k to IRA

Another popular option is to roll over the old 401k into an individual retirement account (IRA). I personally prefer this option because 401k plans usually do not offer the best investment options, and the administrative and management fees can be high.

A 401k plan can only be offered through an employer, but an IRA account can be open by anyone. You have a choice to select a brokerage firm, open an account and then ask them to roll over your 401k funds into a new IRA account.

One of the best benefits is that you do not need your employer’s approval when deciding how and where to invest your money. And typically, IRAs have lower fees than 401k plans so, you can save big on it over the years. Most of my IRA money invested into the low-cost index funds from Vanguard and Fidelity.

Cash out 401k

Finally, you still have an option to cash out your 401k money. It sounds like an easy option to cash out your old 401k and start over with a new employer. But if you try to cash out before a certain age, you will face an early withdrawal penalty. While there are exceptions like death, disability, or medical issues, you might lose a lot of money if you choose to take out your 401k funds early.

401k withdrawal rules

a dollar bill with coffee beans in a bowl-benefits of 401ks

I believe it is wise to keep money in the 401k or IRA rollover plans as long as possible and delay taking money from these accounts that will add to your taxable income. But if you decide to cash out your 401k funds before a certain age, you need to be aware of rules on distribution.

Penalty for an early withdrawal:

If you withdraw 401k money before age 59 ½ and do not meet an exception that allows you to withdraw early, you will be paying both a 10 percent tax penalty as well as regular income tax on the funds you got withdrawn. That makes early withdrawals very expensive.

Impact of an early withdrawal:

For example, if you decide to take out $5,000 as an early withdrawal, you will have to pay the following, including penalties and taxes:

  • Early withdrawal penalty (10 percent) = $500
  • Federal and state tax withholding (20 percent tax rate) = $1,000
  • The balance you receive: $5,000 – ($500+$1,000) = $3,500

You have to be 59 ½ years old to withdraw 401k (or IRA rollover) money without any penalties. However, certain conditions allow you to withdraw 401k money without any penalties at age 55. Sometimes it is called the Rule of 55.

The IRS makes an exception for middle-aged people. It spares you the 10 percent tax penalty if you have been laid off, fired, or leave a job between the ages of 55 and 59 ½. But you still have to pay a regular federal and state income tax on your withdrawals.

From IRS – the Rule of 55 explained

401k plan Required Minimum Distributions

The IRS calls them Required Minimum Distributions (RMDs). You cannot keep money in your 401k portfolio forever. When you turn 72 (it used to be 70 ½), the IRS requires you to start taking money out of your 401k.

Your 401k plan administrator will be sending you yearly payments from your account. The RMD payments will be different for each 401k owner. Each year you are required to withdraw an amount based on your life expectancy and how much money was accumulated in your account. And if you fail to make a withdrawal you will have to pay a tax penalty and still make a withdrawal. Additionally, you will pay a regular income tax on your withdrawals.

If you have more than one 401k, you will need to take a separate RMD from each account. That is why it will be easier to combine all 401k accounts into one when you retire or ready to withdraw your retirement savings.

It is good to remember that many brokerage firms offer a service of calculating your RMD and sent the paycheck to you automatically.

Related Post: Smart Ways to Take Money Out of Retirement Accounts

The Bottom Line

The 401k plan has grown to become the most popular retirement plan in America sponsored by employers. Many people depend on the money they have invested in 401k plans to provide for them in their retirement years. A 401k plan offers a great opportunity to save for your golden years. Without your 401k savings, you will be only relying on a Social Security paycheck which can easily turn into a meager existence.

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