Turn Your Small Raise Into Big Savings
Matt K. Logan, CFP(r)
The economic dynamics and implications of shifting to a saving rather than a spending mindset can make a significant difference in long term financial well-being. Based on your base salary, a 3% raise may not equate to much on a weekly or monthly basis. However, redirecting a small raise that might otherwise be frittered away mindlessly into a 401(k), IRA or savings account can increase your annual savings with nominal impact to your current lifestyle.
Hypothetically, what if your small raise amounted to $25 per week and you invested this amount into a retirement account that earned 10% annually. In 20 years this pitiful salary increase will have padded your retirement account by $75,000 or over $500,000 in 40 years. By channeling that small monthly raise into a vehicle that yields an annual interest rate you reap the benefits of greater financial security than you would have had without it.
Based on information from the U.S. Bureau of Economic Analysis most Americans have a nonchalant attitude about saving. Personal savings reach an all-time high of 17% percent in 1975 and a record low of 1.90 percent in 2005. According to the following chart from trading economics the most recent trends indicate that household saving in the United States were at a paltry 5.70% in July 2016.
While it is understandably difficult to save when your current income is hardly sufficient to cover monthly expenses, choosing to save even a small increase is a better option to spending it. Even if you were barely getting by without it and on a week-by-week basis it is an insignificant amount, why not consider if one of the following strategies can help you to start building a nest egg for emergencies or even retirement.
- Save the increase in a traditional 401(k). One of the benefits of increasing your IRA or 401 (k) is that you can defer paying income tax on the amount contributed. As a result, you reduce your taxable income by the amount of your contribution to a regular 401 (k).
- Plan to shift the savings you have made from your wallet to a bank account. If you consistently place the nominal increase into a savings rather than checking account it is easier to see the results. Even if you add the money to a piggy bank, take the time to record the amount and keep a running tab after each deposit
- Make an effort to save all or the largest portion of each raise. While it may not be feasible to save every penny of every raise, incremental increases can add up to big savings over time.
- Use small increases as a tool to help you adopt a saving mindset. Plug up any spending leaks and add the savings to the account or money jar.
- Plan to use a percentage of your annual raise to increase your retirement plan contribution by at least 1% each year. This strategy is multifaceted in that it
- allows you to keep pace with cost-of-living increases,
- continuously increase savings for a more comfortable future, and
- Double the balance you would have at retirement
Taking a positive accumulative action rather than doing nothing with a salary increase is more important than anything else. By developing a strategy to reduce rather than expand your spending ability, your bank account will soon reflect a healthy balance. Keeping a retirement plan or bank account growing instead of your spending power regardless of your salary increases is one way to start moving toward greater financial independence.
Matt Logan Inc is an independent firm with Securities offered through Summit Brokerage Services, Inc., Member FINRA, SIPC. Advisory services offered through Summit Financial Group Inc., a Registered Investment Advisor. Summit Brokerage Services, Inc., its affiliates and Matt Logan Inc. do not give tax or legal advice. You should consult an experienced professional regarding the tax consequences of a specific transaction. These are the views of Matt Logan Inc, and not necessarily those of Summit Brokerage Services, Inc. and any of its affiliates and should not be construed as investment advice.