6 Ways to Free Up Cash and Invest More in Your 401(k)
Retirement can easily last over 20 years, requiring you to amass a sizeable nest egg. One of the easiest ways to do that is through a company-sponsored 401(k) plan.
The 401(k)-plan available through your company has tax advantages, is automatic, and in most cases, will have a matching component—which means that contributing to it should be a no-brainer. Unfortunately, however, far too many Americans are underfunding their retirement plans—creating a shortfall when they reach their golden years. And, if you're not contributing to your retirement fund, you are leaving free money on the table.
The good news is that there are ways to save more money and increase the amount of savings that goes into your 401(k). From reducing your monthly outlays to choosing investments with low fees, here’s a look at six ways to boost your retirement savings.
Tips to Put More Cash Toward Your Retirement Fund
1. Curb Your Expenses
For lots of people just starting out in their careers and veteran employees alike, saving money in a 401(k) can be difficult to do. With crippling student loans for graduates and scores of Americans living paycheck to paycheck, putting money in a 401(k) simply isn’t an option for many. However, it’s a necessity and something that should be a priority no matter what your financial picture looks like. That doesn’t mean you have to allocate 75% of your salary to your 401(k) but you should contribute enough to at least get the company match, which on average is 2.7% of an employee’s pay, according to Investopedia. A surefire way to achieve that is to slash your monthly expenses. Those two cups of pricey coffee may help you get through the day, but if you forgo one of them, that’s a few extra dollars you can contribute to your 401(k). Do that with other aspects of your life and you can easily find money to save for your golden years. That savings will add up over the weeks, months and years.
Mobile apps can also help you save any spare change and put it right into an investment account. With these apps, you link your credit or debit card and every time you make a purchase it is automatically rounded up to the next dollar—with the difference going into the app’s savings or investment account.
2. Go Automatic
One of the best ways to save is to make it automatic, requiring zero intervention on your part. Left to your own devices, your good intentions can easily fall by the wayside. For instance, impulse buys or tantalizing excursions may trump your savings efforts if it's not automatic.
Most companies offer employees auto-enrollment in their 401(k) plans in which the contributions come out of your paycheck before you see it. Keep in mind that many plans have a default contribution that may be lower than the employer match. It’s a good idea to set up your automatic payroll deduction so that it deducts at least the amount your company is willing to match. With some plans, you can set the contribution to automatically increase after a specified period of time, such as every six months or once per year. If your plan doesn’t offer automatic increases to contributions, make sure to increase it as regularly as you can. If the contribution comes out of your paycheck before you see it, you will hardly notice the difference.
3. Choose Low-Cost Investments
When it comes to investing, fees can make a big dent in your retirement savings prospects. Go with an actively managed mutual fund and you may be required to pay a percentage of your investable assets. That percentage is money that isn’t going toward investments and isn’t benefiting from compounding interest.
One way to increase the amount of savings going toward your 401(k) plan is to choose low-cost investments. Exchange-traded funds, index funds and passive investments all have much lower fees than their actively managed brethren. For instance, with an index fund, the average fee is 0.25% of invested assets, which is much lower than an actively managed mutual fund. The average expense ratio for passive funds was 0.15% in 2017, according to a study by Morningstar.
In addition to poring over your investment choices when setting up or updating your 401(k), look at the fee disclosure statements to ensure you aren’t overpaying. If you find an investment that has a high expense ratio, swap it out for one with lower costs. The expense ratio measures how much of the assets in the fund go toward operating and administrative costs. Those expenses reduce the investable assets in the fund, which means a lower return for you. A good rule of thumb is to choose a fund with an expense ratio of 0.25% or lower.
4. Restructure Debt
If the goal is to free up more cash, than restructuring big debt can be a way to achieve that—as long as you get a lower interest rate. If you are able to refinance your mortgage or restructure other debt into lower interest rate products, it can give you more money to put toward your retirement account. The idea is to put extra money away each month instead of spending it, so make sure to be disciplined with this strategy.
5. Throw Bonuses and Tax Refunds at Your 401(k)
Taxes don’t only conjure up feelings of dread and fear. For countless people, tax season reminds them of tax refunds, which means it's time to splurge. If you are one of the lucky ones to get a tax refund each year, then you have yet another way to increase your 401(k) savings. Instead of blowing it on something you don’t need, deposit it directly into your retirement account. The same goes for your year-end bonus. It's fine to spend a little on yourself—but put the lion’s share toward your retirement account.
6. Get a Side Gig
Thanks to the side gig economy, there are all sorts of ways to make extra money that can go to your 401(k) account. Ride-hailing companies like Uber and Lyft and delivery services like DoorDash and Grubhub are just a few examples of the part-time jobs you can get. But it doesn’t end there. You can consult private clients if you have a marketable skill, take a part-time job at a retailer, or sell some belongings that you no longer use.
Retirement isn’t the end—it’s the next chapter in your life. And if you're aiming to spend more years in retirement than in the workforce, you're going to need a sizeable nest egg. Throw unexpected medical expenses into the mix and saving as much as possible for retirement becomes imperative. In a perfect world, we would save the maximum allowed each year. However, in the real world, far too many people save less than what their company is willing to match and countless others aren't saving any at all.
Even if you're living on a shoestring budget and saving as much as possible, you can still find ways to generate more cash. And any increase in the amount you save in your 401(k) is better than nothing. By following these six tips, you can raise your contributions and set yourself up for a comfortable retirement.
Brian Welch is a digital analyst and writer. He draws from his analytical experience to write about data and money for various Internet sites. He lives in downtown Atlanta.
All content provided in this blog is supplied by Brian Welch and is for informational purposes only. Barclays takes no position as to the views, and makes no representations as to the accuracy or completeness of any information contained in the blog or found by following any link within this blog.