Investing can help you grow your retirement nest egg. But if you’re like most of us, your bills and other expenses are competing with your investment account for your attention. Finding the extra cash can seem like an insurmountable task.
However, when it comes to investing, starting early and investing regularly can have a huge impact on your retirement funds. Compounding—which happens when you reinvest dividends earned from your investments—can greatly increase your returns over the years.
In a perfect world, we’d all have the funds and know-how to start investing with our very first paychecks, but life doesn’t always work that way. Even if you’re just starting to think about investing, there’s still time to build a better financial future. And a few everyday moves and small sacrifices can help you shore up cash to invest more.
Slash and burn your tracked expenses
Tracking your expenses for a month or two is one of the easiest ways to tell where—and how easily—you can cut back on spending. Some costs are fixed: your rent, mortgage, or car payment, for example. However, some expenses can certainly be eliminated. For instance, you might try to spend $50 less each week on groceries and watch your savings grow.
You can apply this savings method to almost every spending category. Use less electricity and water to save on your utility bills by shutting off lights when not in use and speeding up your showers. Depending on your usage, the difference may not be substantial, however, it’s extra cash you can put toward investing. Soon, those behaviors will become habits and then second nature, benefiting both you and your investment account.
Reduce your debt
The sooner you get out of debt the better. If you lower your monthly payments each month, you can put that extra cash toward your investments.
When devising a plan to reduce your debt, review the interest rates on all of your credit cards and debts. Call the creditor with the highest interest rate first to see if you can get a reduced rate. Work your way through your cards, hopefully negotiating better terms for yourself. If you aren’t having success, consider consolidating your debt into a single personal loan or a credit card with a low APR interest rate.
From there, start paying off the credit card with the highest interest rate and then work your way down. Alternatively, if you need a psychological win to motivate you, consider the snowball method—paying off the card with the smallest balance first and then moving up the list.
Embrace the 30-day rule
The need for instant gratification can get any of us into trouble. After all, when practically anything you want is one click away, impulse buying is all too easy.
If this sounds familiar, then you may want to give the 30-day rule a whirl. Let’s say you are eyeing a pricy digital device or a new pair of shoes. Hold off on purchasing for 30 days. Typically, by the end of the 30 days, the urge or desire to buy the item will have passed. If you don’t think you can wait 30 days, then try waiting just 48 hours before buying the item. Even two days is often enough to realize you didn’t need it anyway.
Reduce your subscription services
It’s not uncommon for a household to have a cable service, streaming content subscription, high-speed internet, video game service, and cloud storage. In most cases, some are rarely used. There are also mobile apps and other subscriptions you pay monthly for and never use.
Take inventory of every subscription service you’re paying for each month and ask yourself whether or not you need it. For instance, you might not need both a cable and streaming service. Doing an audit of your subscriptions can yield you significant savings.
Choose low fee investments
When it comes to investing, fees can make a big dent in your prospects. Go with an actively managed mutual fund and you may pay 1 percent or more of your investable assets. That is money that isn’t going toward investments and isn’t benefiting from compounding returns. One way to increase the amount in your investment account is to choose low-cost options. Exchange-traded funds, index funds, and passive investments all tend to have much lower fees than their actively managed brethren. With an index fund, for example, the average fee is 0.25 percent of invested assets—much lower than an actively managed mutual fund.
In addition to pouring over your investment choices when looking at your account, look at the fee disclosure statements to ensure you aren’t overpaying. Find an investment that has a high expense ratio and swap it out for one with lower costs. The expense ratio measures how much of the assets in the fund go to operating and administrative costs. Those expenses reduce the investable assets in the fund which means fewer returns for you. A good rule of thumb is to choose a fund with an expense ratio of 0.25 percent or lower.
A lot of the spending we do happens when we don’t have a plan. If you make a list for shopping outings and stick to it, you’ll cut down on overbuying and impulse purchases.
If you have a limited amount of money to contribute to your retirement savings and investment accounts, don’t use that as an excuse not to save at all. No matter what your budget is, there are ways to shore up more cash to go toward your investments. Vowing to reduce costly debt, reining in spending, and lowering the services you pay for each month can go a long way in freeing up more cash.
Mike Rivers is a financial adviser and retirement planner. He draws on his 20 plus years of experience in the industry to write about personal finances for a variety of publications. He lives in New York City.