Finance gurus like Dave Ramsey say that you should put off saving for retirement until you have all of your debts paid off. I followed this advice, but in my case it was detrimental. Lately I've been wondering about the wisdom of that advice.
Consider my case. I was raised in a household where neither of my parents saved for retirement because they were living paycheck to paycheck. When my dad died at 38, the only “retirement” he had was Social Security. My mom had to scramble to find a job and start saving for retirement.
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Saving For Retirement While In Debt
In my own case, I graduated with my bachelor's degree when I was 24. I worked for two and a half years after that, but all my extra money (and there wasn't much because my job paid so little) went on my student loans. I couldn't pay them all off before I went to graduate school. I graduated from grad school when I was 29, and I've just now finished paying off my student loans.
I never set aside money on my own for retirement because I thought I never had the money because I had to focus on paying down debt first. I would be in serious financial trouble right now had my employer not mandated that all employees have 8% of their pay taken out and contributed to their retirement fund. Because I worked for the company for more than five years, when I quit, I walked away with my retirement contributions plus the company's match.
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Does this story of not having money to save for retirement sound familiar? It should because studies show that 80% of people, even those close to retirement, have less than $100,000 saved for retirement.
If you, too, think you have no money to save for retirement, first realize that even if you can't save as much as you want for retirement, saving something is better than saving nothing. The earlier you can start the better because you'll have compound interest on your side.
Whether you're a broke college student or a family juggling expenses and trying to make ends meet, you can use these strategies to find money to save for retirement:
1. Use Your Tax Refund.
If you're one of the Americans who gets a tax refund every year, consider using it to fund your retirement account. Many people tend to think of tax refund money as blow money. They use it to treat themselves, to take a vacation, or to buy something they've wanted but didn't have the money for. Why not instead use it to invest in your retirement fund? Year after year that money will multiply and grow, securing your future.
2. Automatically Deposit A Small Amount.
Part of the trouble with retirement funding is that it takes discipline. Take the discipline out by making the deposits automatic.
Have a small amount automatically deposited every paycheck or every month. Even if you can only afford $10 or $20 per paycheck, that can be a $40 to $80 deposited a month depending on how frequently you're paid. That doesn't sound like a lot, but over time it adds up.
3. Use “Found” Money.
Another strategy is to use found money. For instance, keep your excess change in a jar. Every three months or so, cash it out and put that money in your retirement account. That could add up to about $150 to $200 a year depending on how frequently you pay in cash. Another idea is to put any money you get from rebates into your retirement account.
Even if you feel like you have no extra money, these strategies can help you build your retirement fund little by little.
When you're more financially stable, you can always add more. The important thing is to get started now with whatever money you can find.
What strategies do you use to make saving for retirement easier?
These are all great ways to start saving for retirement if you’re in debt or have little to start with. I waited to start saving until my debt was paid off and I wish I could go back and do it differently. I think you can do both, it just requires discipline, commitment and some hard work. I believe you could split up the money going towards retirement and debt, with the majority at the debt, and once the debt is gone you can shift it all towards retirement investing and be easier to manage since you were already doing something with it anyway.
Great ideas all. The human psyche is great at adjusting to the constraints applied to it. So big windfalls just feel like excess — excess that you can send straight to savings. Same effect applies to automatic withdrawals taken at payroll; if you never see it then you don’t feel like you’re missing anything :)
Those are good ways to save. Some people also keep a “penny jar” and throw all their loose change in it. It’s a somewhat painless way to put aside money for retirement. You can even throw in all your dollar bills and all your $5 bills if you want. Also if you get any rebates or money saved from coupons you can put that in the penny jar too.
I having a certain amount taken out of the paycheck each month. Out of sight, out of mind!
I agree with you. Start saving for retirement even before you’ve paid off your school loans or whatever type of debt you may have. I did that by default (I actually thought my 401 contributions were mandatory with my company – they weren’t, but thank God I didn’t know that at the time). It took us a long, long time to get those undergrad and grad school loans paid. We finished them up 9 months before our eldest started college. Now our youngest is out of undergrad, but still in grad school – which we are not paying for ’cause we’re fully funding our retirement and paying off this mortgage. We didn’t even begin earning any real money until we were 29/31 years old (and by “real” money, I mean less than $30K – ugh!). But, I think (hope) we’re getting to financial independence – slowly, very, very slowly.