Given how valuable IRAs can be to your retirement – largely because of the tax-deferred (and in the case of Roth IRAs tax-free) investment growth that can occur for many decades – it’s absolutely essential that every taxpayer trying to fully fund their IRA each and every year.
But even as many of us understand the concept that saving for retirement is important, we don’t always do a good idea of maxing out our annual contributions. Other things always seem to find a way of competing for our financial resources. Simply put, the best way to guarantee our ability to contribute is to plan for it. Here are some tips for coming up with just such a savings plan.
Make an Honest Financial Self-Assessment. You can’t build a savings plan unless you know exactly what financial resources you have to work with. The most direct and easily understandable way to do this is to conduct a personal cash flow analysis. Over a period of several months, make a record of everything you spend your money on, what categories of expenses may be increasing, and what categories of expense you may be able to reduce. Make every attempt to record every dollar that comes in or goes out, as the “little things” can really add up.
Consider a Zero Sum Budget. One technique for preparing a personal budget is to make a “zero sum” budget. Inspired by corporate accounting rules, this technique requires you to balance out all of your income with all of your expenditures (including savings), so that every dollar is accounted for somewhere on the budget. This forces an individual to identify exactly how much they’re going to save each month, which in turn makes it easier to follow the plan that they make.
Understand that Your Situation is Unique. There’s no shortage of advice on how to come up with a budget or a savings plan. While it might be tempting (and certainly easy) to just “cut and paste” a particular plan or savings formula and use it as your own, there can be some serious shortfalls in this approach. Consider not only your own financial obligations, but also your personal preferences on what types of spending are most important to you.
Be Open to Change. The importance of making the maximum contributions to your IRA each and every year cannot be overstated. Each year provides a “use it or lose it” opportunity to accumulate more for your retirement. If you fail to make a contribution in a given tax year, you’ll never have the opportunity to go back and make up for that shortfall. Coming up with a savings plan to make those maximum contributions may require you to change your lifestyle, or at least to cut back on certain spending habits you may be accustomed to. Be open to these changes for the sake of your financial future.