Saving for retirement can be a challenge for many, let alone for those doing so on a small income. When you have limited resources, it’s easy to put off investing thinking you can deal with retirement “later.” A recent study from Earnest, Amino and Ipsos bears this out, showing only 31 percent of Millennials are saving for retirement. The top reason given for lack of retirement savings is a lack of funds.
You may think having a lot of excess money is required to save for retirement. That is not the case. If you’re looking for how to save for retirement on a small income, here’s how you can do it successfully.
Don’t Think That You Need a lot of Money
You don’t need a lot of money to start saving for retirement. In fact, you can start with very little. Most 401(k) plans have no starting balance requirement, as do numerous online brokerages. You can even use a robo-advisor to manage the investments for you and start investing with a few hundred dollars.
The key to keep in mind is that it’s not what you start with that matters, but the time you give your money to grow. “When you are young, time is definitely on your side when it comes to investing so the more you delay, the more you will have to save than if you had started early,” says Mount Pleasant, Michigan based CFP® LeeAnn Arens.
Time is the best thing you can give your investments, even in small amounts. The Center for Retirement Research at Boston College bears this out showing that those who start saving at 25 have to save three times less money than someone who puts off saving until 45.
The moral? Start saving, even if it’s in small increments to give your money time to grow.
Don’t Overlook Your 401(k)
The previously mentioned 401(k) is often the best tool to start saving for retirement. Many plans allow you to start at $0 and put a certain percentage of each paycheck into the account.
Life gets busy, but with a 401(k) plan it doesn’t matter – thanks to automation. “One of the best ways to save for retirement is to have it set up automatically. Take advantage of your employer’s 401(k) plan and sign up and start contributing,” says Arens. Automation ensures deposits will be made, plus you won’t feel the money coming out of your paycheck since it’s done for you.
The other great part of 401(k) plans is the match. Many plans offer a matching contribution – meaning you get free money to save for retirement. This instantly increases the amount you can save. If you don’t have a 401(k) plan, don’t fret. Many online brokers allow you to automate deposits.
Don’t Spend Too Much
Spending cuts two ways when saving for retirement. When on a small income, you must watch spending to ensure you have money to take care of all your responsibilities.
Spending doesn’t just impact your daily life. Thanks to fees prevalent with investing it also impacts your investing life. Believe it or not, but cheap is good when it comes to investing as the more you spend to invest results in less money working for you.
Make sure to compare fees when looking at investments in your 401(k) plan or online broker to ensure your money is working for you and not lining someone else’s pocket.
Take Advantage of Found Money
Living on a limited budget can be challenging, making things like investing more difficult. In situations like this “found” money can be a great tool to further your goals.
Found money can come in various forms – from a raise at work to working overtime or receiving a big tax refund. When you find these excess funds, you can throw them at your investing to give it a boost. You may even want to pursue a side hustle to grow your income and have more to invest.
Watch Out for Emergencies
Living on a lower income means you have less room for error. When emergencies arise, it becomes even more difficult. You may be tempted to dip into your retirement funds to pay for those emergencies.
Doing so can only cause more problems. “If you have an emergency fund set aside when that rainy day problem comes knocking at your door, you won’t need to dip into your retirement- which will save you taxes, penalties, possible fees, and heartache,” says Arens pointing out the importance of having an Emergency Fund.
Set a goal to save $500 for emergencies, and then grow it to $1,000. You may need more, so make sure to personalize it to your needs. Once you hit that goal, you can move your focus to saving for retirement, knowing you have what’s needed to cover in the case of emergencies.
Saving for retirement on a small income can be a challenge, but following a few of these tips will let you overcome that challenge and invest with confidence.