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“Skip your daily latte” is a popular supposed cure for all of life’s financial ills. Have student loan debt? Skip your daily latte to pay it off. Can’t save for retirement? Skip your daily latte! Drowning in kids’ expenses? Skip the latte!
The problem here is twofold. First, 42% of Americans say they currently make their daily coffee at home instead of buying it at a restaurant or cafe, according to a recent NerdWallet survey. So the advice to simply skip that latte is irrelevant for many.
Second, while skipping your workday latte and redirecting that cash toward retirement savings or another financial goal would help, there are other, more effective actions you can take to boost your savings while staying caffeinated. Here are five options for increasing your retirement contributions in the new year.
1. Rent below your means
More than 2 in 5 Americans (43%) say that housing expenses are a barrier to their ability to save for retirement. If you’re able to spend slightly less than your budget allows for housing and direct that extra cash to your retirement fund, it can add up quickly.
Whether you choose to rent a smaller place, live in a less trendy neighborhood or get a roommate to share housing costs, the savings can make a big impact if you invest it for your future.
2. Pick up a side hustle
Getting a “side hustle” is another popular piece of financial advice, but hear us out: Increasing your income to add to your retirement account allows you to boost your savings without sacrificing your other expenses. Side hustling may take the form of a part-time job, freelancing gigs, selling unused items in your home or other options.
For simplicity’s sake, we assumed these earnings were after-tax. If you go this route, keep in mind that most side hustles require you to report your income for tax purposes.
3. Minimize auto expenses
A car isn’t optional in much of the U.S., but the costs can be flexible.
According to auto-information site Edmunds, a new Ford F-150 can lose nearly 40% of its value — or $18,749, assuming a new purchase price of $50,154 — in the first three years of ownership. Buying a 3-year-old truck would effectively save you that money, minus perhaps some increased maintenance costs for the older vehicle.
So let’s say you decide to save some cash by buying used cars instead of new. You shave $10,000 in depreciation by buying a 3-year-old vehicle instead of a new one every five years — for an average savings of $2,000 per year — and you repeat that pattern over the course of 20 years.
That’s not the only way to save on car expenses. If you live with a partner, consider whether you need two vehicles or if it’s reasonable to share one. And in many cities it makes more sense to go without a car due to an abundance of transit options and a lack of affordable parking.
4. Pay off debt according to interest rate
Crushing debt may keep more Americans from putting cash away for their futures. Close to half of Americans (44%) say debt payments are a barrier to saving for retirement, according to the survey. The quickest (and cheapest!) way to pay off your balances is in order of interest rate, highest to lowest.
Let’s say you have these three credit card balances:
- Credit Card A: $6,000, 20% APR, $120 minimum payment
- Credit Card B: $5,000, 18% APR, $100 minimum payment
- Credit Card C: $2,000, 15% APR, $40 minimum payment
Say you have an extra $40 in your budget after your minimums are paid, so you pay a total of $300 a month. By paying these debts in order of interest rate, you would save two months of payments and $570 in interest charges over paying them in order of balance, from smallest to largest.
What does this have to do with your retirement savings? The quicker you pay off your balances (and the more money you save doing it), the faster you can start prioritizing your retirement savings. And while $570 may seem like small potatoes compared with some of these other money-saving tips, eliminating debt payments from your monthly budget and redirecting that cash to your investment account can make a huge difference over time.
5. Save in a tax-advantaged account
Many Americans can reduce their taxable income by saving for retirement. Whether you have access to a workplace retirement account, like a 401(k) or 403(b), or open an IRA with a brokerage firm, saving in a tax-advantaged account decreases the amount of your income that is taxed, freeing up more money for you to save.
Say you’re able to save $400 a month in your IRA, for a total of $4,800 per year. If you have an effective tax rate of 20%, that’s $960 in tax savings that can also be funneled into your IRA.
These additional retirement contributions into a tax-advantaged account can decrease your tax liability even more, increasing the amount of cash you have to save and invest.
Each of these options can help boost your retirement fund, but only if you invest the savings there and don’t redirect it toward other spending.