Most individuals understand that it can sometimes be challenging to come up with money each year to contribute to their retirement accounts. Even those who’ve already set up their own IRAs, and who understand the value of saving over time, may still find it difficult to make the maximum contributions to their accounts each year.
One of the reasons this is problematic is that too many individuals consider their retirement contribution something that they pay attention to once a year, most likely at the end of the calendar year (when they’re certain to be facing other demands on their personal finances). Putting an automatic savings plan in place can be a particularly effective way of making the maximum contributions to your self-directed IRA each year.
What is an Automatic Savings Plan? An automatic savings plan is simply a process by which you automate the act of saving. It is generally accomplished through the use of automatic debits and payments for one account or another. For example, you might set up a monthly automatic transfer to be made from your primary checking account each month, and the funds contributed to your self-directed IRAs. This can be done for any financial purpose or to help you reach any particular goal, but it’s especially useful for allowing you to meet your retirement savings goals.
What are the Sources of Your Self-Directed IRA Contributions? The most important aspect of an automatic savings plan is that the contributions happen automatically. Simply setting a monthly or quarterly calendar reminder for yourself to make a contribution may not be enough. Giving yourself the opportunity to forego a contribution means there’s a possibility that could happen.
You must identify the accounts that you’re going to use for making your automatic contributions. Consider your checking account, savings account, taxable investment account, or some combination of them.
What is Your Budget? Before you can determine the specific parameters of an automatic savings plan, you need to have a savings goal in mind. While contributing the maximum amount to your self-directed IRA is ideal, that may not be reasonable with your current budget. In addition to helping you identify how much you can contribute to your self-directed IRA through an automatic savings plan, preparing a personal or household budget may aid you in learning more about other expenses you might be able to cut back on.
The timing of your automatic savings plan is also important. Do you want your contributions to be made monthly, or perhaps quarterly? Or would bi-monthly work better for your particular budget and cash flow?
Finally, once you have an automatic savings plan up and running, go back and reevaluate your plan at least once a year. As you advance throughout your career, could you make larger contributions to your account? Could you make your contributions earlier in the year to give your money more time to grow? Staying on top of your automatic savings plan can help you reach your long-term goals.