How I created an on-ramp towards financial success for myself.

Reaching towards your financial goals can feel daunting. If you cannot afford to max out your retirement contributions every year — don’t. Find the amount that you can afford to contribute and then increase that amount from 1% to 2% every year. Is this as sexy as maxing everything out? No, but it is realistic and keeps you on a constant path towards your goals.

My Experience

When I got my first job out of college, there were so many places my money was being pulled — retirement savings, a new apartment, video games. I also had no idea what my first year on my own would look like financially.

I decided to save a small percentage of my paychecks every pay period to put towards my retirement accounts.

In my first year, I made about $46,000.

I started by putting 3% of my paycheck towards my 401(k). This allowed me to meet my employer’s match of 3%. This was roughly $60 per bi-weekly paycheck or $1,380 for the year. Since this was matched by my employer, I actually had $2,760 put away towards my 401(k) in my first full year.

For my IRA I chose 6% of my bi-weekly paycheck which was about $120 per bi-weekly paycheck or around $2,760 for the year. At the time, the limit to your really IRA contribution was $5,500 (currently it is $6,000). I was about halfway to the max contribution amount.

Seeing how easy this was my first year, I made a simple plan for myself. I would continue visualizing my contributions as a percentage of my yearly income and incrementally increase my contributions every year.

In the image below, I have put together a table and chart of what this simple plan would look like if you started with 1% towards both a 401(k) and an IRA over 10 years.

Why did this work for me?

1. It was automatic.

I did not have to do any real planning, and since it automatically came out of my paycheck, I did not have to remember to make these contributions.

I was able to talk with my employer about setting up two separate distributions for my paychecks. My 401(k) was already taken care of, but my IRA was separate from my employer.

For my IRA, I had the portion sent to a separate brokerage account where my IRA was held for every paycheck. If they were not able to do this, I would have just made automatic transfers with my bank to do the same thing.

This made everything completely automatic. I did not have to see it or think about it.

2. It was incremental.

In my second year, I increased both of my contributions by an additional 2%.

I did not feel it.

I did not notice it on my budget, and it did not impact my lifestyle. The incremental nature of this increase allowed me to easily absorb the change into my spending routine.

3. It gives me a simple, solid plan of progression.

As long as my income and job do not dramatically change, I have a plan of progression to continually improve my retirement contributions. The end of the year does not sneak up on me. I have my plan and money in place every year.

There are plenty of other ways to determine what you should contribute towards your retirement, but if you have not yet started or just got your first job, this is not a bad start.

Keep this simple plan as your baseline. You can always add more to this plan or just make another contribution if you have extra money at the end of the year.

A few things to consider…

401(k) vs. IRA.

Most people would probably recommend that you consider maxing out your IRA before you contribute more to your 401(k). The IRA has a much smaller contribution limit.

Your IRA can be more flexible because it is typically not tied to your employer, there is a lot of options for investing within your IRA, and there are many choices for IRA brokerages. Overall, you have a bit more control of the money in your IRA.

This preference is totally up to you. Consult with a financial advisor or look into other resources to figure out what would be best for your situation.

Don’t forget about the contribution limits and stay organized.

There are limits to how much you can contribute towards your tax-advantaged retirement accounts. Make sure to track your contributions so that you do not go over the limit.

This simple plan will not work for everyone, but it is a good baseline to start with. Ultimately, I think that making small, incremental increases towards your retirement contributions is the best way to start and can provide you a create ramp to your financial future by helping your build a habit for saving.

What is your retirement savings plan? Share with me how you started with figuring out your financial goals! I have also included a link below to my google sheet of this simple calculator. Just open the link, copy the sheet, and enter in your yearly salary to get a visual for yourself!

Google Spreadsheet: https://docs.google.com/spreadsheets/d/1GZbcQIGAJKdwNaw5CH-FnWinDP65UStgt3uBnvxCJrg/edit?usp=sharing

Article Originally Posted Here: https://medium.com/@writerrobertlee/how-to-save-for-retirement-on-the-cheap-2dfe94e867e6