It’s a new year, so that means most people will be making an annual list of resolutions. These typically range from paying off debt to saving more, losing weight and building better relationships. Pretty much anything you want to change can be included as a resolution for the new year.
There is only one problem with these resolutions: we typically fail at them. It’s not from trying. We all start out of the gate strong, determined to meet that goal. But somewhere along the way, we lose sight of it or get distracted by life and we slip up momentarily. Some of us are able to right the ship, but for many others, that first slip up is an indication of a steep slope up ahead.
To help you keep momentum and motivation high, I list a few quick and easy financial goals for you to complete. All of them will only take you 10 minutes of your time but will pay big dividends in the long run. So without further ado….
Increase Your 401k Withholding
Simply walk down to your human resources department or email them for the form to increase the amount that is taken out of your paycheck each pay period and goes into your 401(k) or Roth 401k. I’m not asking you to get crazy with the new withholding amount, in fact I am only asking you to raise it 1%. That’s it. If you were withholding 5% increase it to 6%. Of course if you want to increase it more, I am not going to stop you.
Because your 401(k) contribution is taken out of your paycheck before taxes, your paycheck actually decreases by less than the amount you took out. Here is an example for better understanding. Let’s say you earn $25,000 per year and are in the 25% tax bracket. If you contribute 3% of your bi-weekly pay to your 401(k) that comes to $29. So, each paycheck you receive, $29 is taken out and placed into your 401(k). But, your paycheck is only reduced by $22 each time. This is because you aren’t taxed on your 401(k) contribution so it “looks” like you are earning less than you are to the IRS.
If you received any sort of a raise for the year, you will not even notice this extra 1% being removed from your paycheck. And I’ll bet that even if you didn’t receive a raise, you could still increase your withholding 1% and not notice it. Give it a try for a few weeks. You’ll be surprised. If you don’t think increasing your contribution by 1% matters, read my previous post on how much increasing your savings by 1% changes your finances.
Review Your 401(k) Fees
While you are at the human resources department, or within the same email you send them, ask for the enrollment booklet they provided to you when you first started. In the booklet will be a fact sheet for each mutual fund you can invest in that is in your 401(k) plan. Identify the funds you are currently in and note the expense ratio of them. If any of them are high – 1% or more, consider looking at dumping them for other low cost funds in your plan. Unfortunately for many of you, this will not be as easy as it sounds. Most of you are tied to a few funds and most probably have high expense ratios. My suggestion is to look at all of the fund choices and strike out any that have expenses over 1%. Hopefully there are a few funds left. In the worst case scenario, you should hopefully have left on the list of possible investments a bond fund and a large cap fund. Pick these two funds and invest 60% in the large cap fund and 40% in the bond fund (unless the risk questionnaire you completed says otherwise). That’s it. You don’t need to invest in all of the choices. You can use your Roth IRA and taxable account to round out your diversification (yes, you can have a 401k and an IRA at the same time).
Paying attention to fund fees is one of the things that you can control when you invest in the stock market. While it doesn’t seem like investing in a fund that charges 1.25% would cost you that much more than an equivalent fund that charges 0.25%, it does. Refer back to the link above about saving 1% more each year. The difference in saving 1% each year is the same as paying 1% more each year. It adds up to a lot of money over time. And don’t listen to those that try to tell you a fund that charges a higher fee is a better fund or will return more over time. It won’t. It just means you’ll be paying more for it.
These are two quick and easy steps you can take in the new year to increase your motivation for meeting the rest of your new year’s resolutions. Again, they will only take you about 10 minutes each, less if you can access your 401(k) online, and will better your future financial state of affairs. Don’t dismiss how big of an impact increasing your withholding 1% per year or paying 1% less in expenses has on your portfolio 10, 30 or 30 years into the future. Little amounts add up over time. Take advantage of this time by saving as much as you can and by paying as little as you can in fees.
Lastly, here is a bonus tip to save you time come next year: when you are increasing your withholding by 1%, see if you can set it up so that come January of each year, you increase your withholding by 1%. This way you never have to think about it or remind yourself to do it. You will always be saving more each year which means your money can compound upon itself even more each year. Before long you’ll reach the 401k limits. If you can’t set this up automatically, then just set an Outlook reminder at the start of each year so you know to increase your withholding another 1% come the new year.
Do you have any additional easy retirement or financial goals for others?