With the economy improving and gas prices below $2.00 per gallon, you may be accumulating a little cash. Here are five ways to make it work a little harder for you.
1. Make sure that you get your company match-If your employer offers a retirement plan, it will probably match a percentage of the contribution that you make to the plan, meaning it will add some amount of money for every dollar that you contribute, essentially providing an automatic return on your money at no risk. There is no investment you can make that will give you that kind of risk-free return, so take advantage of it. Some people are concerned that if they quit, their employers will take the money that they saved. While it’s true you usually have to be employed for a certain number of years before you get to keep, or vest in, the contributions that the employer makes to your account, the contributions that you make are always yours to keep. So you should contribute to your plan even if you don’t plan to stay there forever.
2. Change your 401(k) plan contribution type-By now you’ve probably heard of a Roth IRA. It can be an extremely powerful savings vehicle because--although you don’t get a tax deduction when you contribute to it--your earnings grow tax-free. And when you retire you can usually withdraw your money from it without paying any tax at all.
Unfortunately, not everyone can contribute to one.
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If your income is too high, the IRS won’t let you. If your income is too low, you may not be able to afford it if you’re already contributing to your company retirement plan.
However, most 401(k) plans now give you the option to make Roth contributions instead of pre-tax contributions. The IRS puts no income limitation on Roth 401(k) plan contributions. And if you have a limited amount to save, it makes Roth 401(k) plan contributions a great way to take advantage of the power of a Roth contribution and still get that all-important company match.
3. Pay off your credit cards –Paying off debt may not meet the technical definition of savings. However, if the goal of saving is to increase your net worth--which is defined as what you own minus what you owe--then reducing what you owe is as good as increasing what you own. After you raise your contribution to your retirement plan high enough to receive all the available free money from your employer, pay down your high interest debt.
If your credit card company charges you 17% interest on your debt and your bank pays you 1% interest on your savings, every dollar of debt that you pay off gives you a guaranteed net 16% interest rate.
4. Open a 529 Plan account to save for college-With even public school costing over $20,000 per year, parents need all the help they can get saving for college. A 529 Plan account is like a Roth IRA for college savings. All contributions to a 529 Plan account grow tax-free and withdrawals are tax-free if they are used for educational purposes. The federal government doesn’t give you a tax break on the contributions that you make, but most states--including Kansas and Missouri--do.
5. Open a UPromise account-If you already have a 529 Plan account, you can sign up for a UPromise account, register your credit cards and then your normal purchases can earn cash back to be contributed to your 529 Plan account. Most online retailers--like Walmart.com and ToyRUs and even travel companies like Orbitz--participate and pay 5% cash back, in addition to any points or rebates that your credit card will give you. You can even invite friends and family to sign up and apply their purchase rewards to your account, which would be a great way for Grandma to help you save for college. This can’t be your entire college savings plan, but it is a nice way to supplement it without much effort.
Of course, not all of these techniques will apply to everyone, so it is always a good idea to consult with an advisor before you make any drastic changes to your current plan.
Ken Eaton is the President and Managing Principal of Stepp & Rothwell, Inc., a comprehensive, fee-only, financial planning firm in Overland Park, KS.
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