Savings Tips For Low Income and Young People
If the world is a perfect place, it would be very easy to put away or save 15 percent of our salaries every year as soon as we hit our early 20s. Basically, we will be in good shape financially by the time we turn 65 if we save that much so early - starting from our early 20s. Unfortunately, the world is not a perfect place. For many people in their 20s, getting a job is a difficult task. Besides, many of them still have to repay the student loans they racked up while in college. With these challenges, they are not thinking about saving for retirement at this time. However, without knowing it, they are actually playing a very dangerous game.
The above explanation confirmed irony about the state of U.S. economy today: Even though it is better to begin saving for retirement when we are in our early 20s, we are constrained by tough job markets and growing student loan balances, among other issues. A natural question to ask at this point is this: what should the low income and young people do? Here are two helpful tips.
Save Anyway
Whether or not you have a full time job after college, saving for retirement can still be difficult. This is because you have demands on your paycheck, from paying rent and credit card bills to building up an emergency savings. So if you can’t afford to save up to 15 percent of your income, you can try 5 percent or 6 percent. You can also bump up your savings rate by a percentage point or two every year. In my opinion, it is best to continue with this approach until you hit the benchmark – 15%. Note that, regardless of how much you earn, it is important to continuously stash away small amount – an approach that is much better than waiting until your income goes up. In fact, you can amass as much as $650,000 by the time you reach 30 if you save 6 percent annually and increase your savings by 2 percent per year, starting at age 25. In contrast, if you wait to start saving until your income goes up, you may be 35 years before this happens. And by then, you can accumulate merely about $400,000 by the time you hit 65 years even if you contribute 15 per cent of your income annually.
Take Advantage of Tax Credits
You might be able to take advantage of certain tax breaks to make savings or contributions more affordable if putting away as little as 6 percent of your income is a stretch for you. For example, contributions to a 401(k) plan are often made before tax. If you are paid every other week, for instance, you would contribute about $68 per paycheck if you earn $35,000 per year and save 5 percent. However, your take-home pay will only be reduced by about $58 because you save on taxes.
You can also open a traditional Individual Retirement Account(IRA) and get a tax deduction for every dollar you contribute, up to the maximum allowed, if you are not eligible to participate in a 401(k) or other workplace retirement plan. In 2012, the maximum allowable amount for this form of IRA is $5000. However, if you are 50 and over, you may be allowed to contribute up to $60001.
Notes
1. Bigda C.(2012, July 29): Savings Ideas for those Who Make Less Money. The Baltimore Sun(Business & Jobs) p. 4
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