Money Management

You can save well for retirement without sacrificing too much. Read on to see how. 

The average American currently has $89,300 saved for retirement, according to Northwestern Mutual. But let’s face it. Over what could be a 20-, 25-, or 30-year period, that’s not a lot of money, even when coupled with Social Security benefits.

If you’d rather retire with a much larger savings balance, then you may be in the habit of spending carefully so you’re able to free up money for your IRA or 401(k) plan. And that’s a good habit to uphold. But there is such a thing as saving too aggressively for retirement. And it’s important to know whether you’ve crossed that line.

When you’re actually saving too much for retirement

There’s a limit as to how much money the IRS will allow you to sock away for retirement each year on a tax-advantaged basis. This year, 401(k) contributions max out at $22,500 for workers under 50 and $30,000 for those 50 and older. IRAs, meanwhile, max out at $6,500 for savers under 50 and $7,500 for those 50 and over.

But you’re not limited to an IRA or 401(k) for retirement savings. If you want to save beyond the limits set by the IRS, you could always do so in a regular brokerage account.

So, let’s say you earn $80,000 a year at age 35 and want to save half your income for retirement. If you have a 401(k) through your job, you could max out at $22,500 and then save and invest your remaining $17,500 in a regular brokerage account.

Of course, saving half of your income for retirement purposes is a great thing — as long as it’s not making you unhappy. But if it is, then it may be time to rethink your approach.

It’s important to save for retirement. But it’s also important to be able to enjoy your life in the near term.

It’s an unpleasant thought to contemplate, but what if you spend your entire career trying so hard to boost your long-term savings that you miss out on enjoyment along the way, only to then end up passing away your second year of retirement? And even if you don’t pass away prematurely in retirement, you still deserve to enjoy some of your money while you’re earning it.

So if you’re in a place where you’re unhappy due to denying yourself different splurges or expenses, it may be that you’re actually saving too much for your senior years. And scaling back could be important for your mental health.

Striking a balance

Going back to our example, say that to save half of your $80,000 salary for retirement, you’ve been forcing yourself to live in a cramped apartment, drive a beat-up old car, and never spend money on meals or social events. Chances are, there’s a middle ground there.

In that case, rather than try to save $40,000 a year for retirement, aim for $22,500, which would max out your 401(k). You’re still socking away about 28% of your earnings, which is great. But that way, you have some flexibility to spend money on things that could improve your life.

Increasing your rent by $300 a month for a more comfortable space could mean enjoying your apartment daily rather than feeling claustrophobic at home. Upgrading to a modest but more reliable car could spare you the stress of wondering if it’ll start in the morning, even if you’re now taking on a $450 monthly auto loan payment. And allowing yourself to dine out once a week or see a movie with friends could work wonders for your social life and general outlook.

It’s commendable to be dedicated to retirement savings. But if you’re denying yourself all manner of near-term joy, you’re probably going overboard.

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A personal loan could make a positive impact on your finances if you use the money to reduce your debt payoff cost. Learn more here. 

A personal loan is one option available to you if you need to borrow money. You can get one from online lenders, banks of all sizes, and credit unions. And as with pretty much all kinds of loans, you’ll pay interest on the amount that you borrow.

In many cases, taking on debt is bad news because the interest costs make things more expensive for you and because you’re committing income you haven’t even earned yet to pay back what you’ve borrowed.

But there are certain circumstances when taking out a personal loan could actually help improve your financial situation. Here’s why.

How could a personal loan make your financial life better?

A personal loan could improve your financial situation if you are taking out the loan to make debt payoff cheaper and easier.

Say, for example, you have two credit cards, each of which are charging you interest of 20.68%, which is the current average interest rate for cards as of May 2023.

You have a $5,000 balance on one card, with a monthly payment of $100You have an $8,000 balance on another card, with a monthly payment of $160

If you can qualify for a $13,000 personal loan with a five-year repayment term at 11.48%, which is the current average interest rate for personal loans as of May 2023, you could lower the cost of both of those debts by using your loan proceeds to pay off the balances on the cards.

How would this help you? The table below shows what it would look like if you kept paying on your cards versus if you took out a personal loan to pay those balances off.

In this case, it’s clear that taking out a personal loan would be the right move. Who wouldn’t want to be debt-free four years sooner and save $12,953.96 in interest?

Is a personal loan right for you?

If you have high-interest debt and can qualify for a personal loan at a lower rate to consolidate it, it’s almost always a good idea to do so as long as you are confident you can make your new monthly loan payments.

You can shop around with different lenders to see what personal loan rates and terms you’d be eligible for and to see if paying off your current creditors with a personal loan would save you money by comparing total repayment costs over time. Your personal loan lender should tell you your borrowing costs and timeline up front when you apply, so it’s pretty easy to see if moving forward with the loan makes good financial sense.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
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Bringing home a new furry friend? Read on to see why that should prompt you to boost your savings. 

When my family adopted our dog Champ three years ago, it was an occasion to celebrate. We’d been looking for a dog since losing our previous pup, Casey, and Champ’s quirkiness and energy level were an instant fit.

My husband and I spent the first few months after Champ’s arrival helping him settle into a routine and get comfortable in our home. But we also made a point to pad our savings after welcoming him into the fold. And if you’re adopting a pet, it’s important to boost your emergency fund, too. Here’s why.

1. You might have to pay for a healthcare emergency

You never know when your pet might get hurt or sick. If you don’t have pet insurance, your costs could be astronomical. It’s important to have extra money in savings in case a health emergency strikes.

Even if you have pet insurance, you’re not guaranteed to have every issue with your pet covered. Pet insurers generally won’t cover treatment related to pre-existing conditions, for example. If you’re adopting an older pet, you might have several conditions that aren’t eligible for coverage.

2. You might have to shell out money your pet insurer doesn’t reimburse for quite some time

Let’s say you do have pet insurance, and your pet needs care that is covered by your policy. You might still have to shell out a lot of money upfront and wait to get reimbursed. And it might take your insurer weeks or months to pay you back.

Unlike human health insurance, where you’ll commonly hand over a copay and have the bulk of your care charged to your insurance company directly, with pet insurance, you often have to foot the bill in full and then wait to get reimbursed. You need extra savings on hand to bridge that gap.

3. You might need to pay for pet-sitting services in a pinch

Maybe you work from home and are around to care for your pet at all times. And maybe you’re not someone who travels a lot, so you don’t really need to worry about a pet sitter.

That might be the case most of the time. But what if your circumstances suddenly change?

You never know when you might fall, break a bone, and find yourself unable to walk your dog for a period. In that case, you’re looking at the added expense of a dog-walker.

Similarly, you might have to go out of town at the last minute to visit an ailing family member or for job-related purposes. Without extra savings in the bank, you might really struggle to cover the cost of a pet sitter.

Pet care has caused 37% of pet owners to go over their pet-related budget, according to a recent Lemonade survey. That’s not a trap you want to fall into.

It’s important to have a solid emergency fund at all times. But padding your savings makes a lot of sense when you’re bringing a new pet into the mix.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
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Most American workers would have difficulty paying for an unexpected expense. Read on to find out how to boost your savings. 

Over one-third of employees earning $100,000 or more live paycheck to paycheck.

There’s a lot of conflicting information out there about how well Americans are doing financially. On the one hand, recent job growth data shows the U.S. added 187,000 jobs in August, and the unemployment rate, although slightly higher than the previous month, is still at a relatively low 3.8%.

But there is also data indicating that Americans are struggling with their personal finances. One of the latest examples of this comes from a report from SecureSave, an emergency savings startup, that showed that 63% of employees can’t cover an unexpected $500 expense.

Here’s what’s happening with American workers’ emergency savings right now and a few tips for how to jump-start your savings if your account has run dry.

Employees can’t find $500

Financial emergencies are scary because they can happen at any time. When a car breaks down, a heat pump stops working, or a pet gets sick, most Americans tap into their savings or reach for a credit card to cover the expense.

Unfortunately, financial emergencies are pretty common. The SecureSave report showed that one in three workers experienced such an event over the last six months.

While a one-time $500 expense would be burdensome for most Americans, their financial picture looks even worse when you consider that 76% of respondents said they lack enough savings to cover a month’s worth of expenses. Generally speaking, most experts recommend having at least three months’ worth of expenses in a savings account.

And it’s not just employees with lower salaries who are struggling to cover a financial emergency. The survey showed that 35% of employees earning over $100,000 annually live paycheck to paycheck.

How to boost your emergency savings

According to the report, many people would have to turn to other sources besides their savings accounts in an emergency, with 19% saying they’d ask family for help and 18% indicating they’d put the expense on a credit card.

RELATED: Emergency Fund Calculator

If you need help jumpstarting your savings, there are a few steps you can take. First, remember that it’s perfectly acceptable to start small. SecureSave says its users save an average of $98 per month in their accounts. But if you can only save $25 or $50 per month, that’s still a good start.

Begin with a goal of having $500 in savings, and look at your monthly budget to see if there’s anything you’re currently spending money on that you don’t need. Or, if you find it easier to make a little extra money rather than cutting back on spending, you may want to look into a few side hustles that could boost your earnings.

And finally, it may be a good idea to look at a few offers from banks right now. Many banks are paying more interest on savings accounts, and some are also offering bonuses when you open an account. Here are just a few current offers:

SoFi Checking and Savings (Member FDIC): Up to $250 bonus and up to 4.50% APY with direct depositDiscover Online Savings (Member FDIC): 4.30% APYAmerican Express National Bank (Member FDIC): 4.25% APY

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The important thing to remember when starting a savings account from scratch is not to get discouraged. Adding just $50 into a savings account can be a great way to get started, and then you can build that amount slowly over time by setting up small automatic deposits into your account. Before you know it, you’ll have a few hundred dollars in your account and be much more prepared for the next rainy day.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.American Express is an advertising partner of The Ascent, a Motley Fool company. Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. Chris Neiger has no position in any of the stocks mentioned. The Motley Fool recommends Discover Financial Services. The Motley Fool has a disclosure policy.

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Want to lower your 2023 tax bill? Read on to learn about one of the most effective ways to do that. 

Paying taxes is something all of us have to do. But most of us would rather hand over as little money as possible to the IRS, right?

The good news is that there are plenty of steps you can take to legally lower your taxes and reserve more of your hard-earned money for yourself. But there’s one specific move that’s just about your easiest bet for shielding income from the IRS.

It pays to max out your 401(k) — or get as close as possible

The nice thing about 401(k) plans is that they come with generous contribution limits. This year, you can put up to $22,500 into a 401(k) if you’re under age 50, or $30,000 if you’re 50 or older. By contrast, IRAs max out at $6,500 for savers under 50 and $7,500 for those 50 and older.

Of course, if you’re an average earner, finding $22,500 or $30,000 a year for retirement savings might seem impossible. And rest assured that many people are not able to max out a 401(k).

But the more money you put into a traditional 401(k), up to these limits, the less income the IRS gets to tax you on. So let’s say you’re 40 and can’t come up with the full $22,500 you’re allowed to stick in your 401(k). If you manage to sock away $5,000, hey, that’s $5,000 of earnings that won’t be subject to taxes. If you fall into the 22% tax bracket, that means you’re lowering your 2023 tax bill by $1,100.

You only have a limited amount of time

One nice thing about IRAs is that you have until the following year’s tax-filing deadline to make contributions. So let’s say you want to max out an IRA at $6,500 for 2023. You actually get until mid-April of 2024 to get that money into your account. So if, for example, you’re getting a year-end bonus payable on Jan. 1, you’re able to use it for 2023 IRA purposes.

But 401(k)s work differently. With a 401(k), you only get until Dec. 31 to finish funding your account. So if you’re eager to shield more income from the IRS, now’s a good time to increase your 401(k) contributions.

To do so, contact your benefits or payroll department and ask what the process is for making that change. You may be able to do it online, depending on your employer. In fact, one good thing about 401(k)s is that you can change your contributions whenever you want. The only thing is that it may take a few pay periods for those changes to go through.

Another thing you should know is that many employers match employee contributions to a 401(k) to some degree. But those matching dollars don’t count toward the aforementioned limits.

So, let’s say you’re 40 and you are getting close to maxing out your 401(k) for the year. You may have another $500 coming your way from your employer in the final quarter of the year in the form of a match. But that $500 won’t count toward your limit, so if you’re able to put in a full $22,500 out of your paychecks, it pays to go for it.

Paying taxes may be unavoidable, but that doesn’t mean you can’t take steps to lower how much you pay. And if you’re able to pump more money into your 401(k) before the end of the year, you might end up really happy come tax season.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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