New Year’s resolutions abound in January. They can sound like a good idea, but people often struggle to put in the hard work and dedication to turn them into an actual habit, which can lead to scrapping the resolution altogether. However, many good financial practices require little effort after sitting down once (or a few times) to set them up.
If you want to make a financial change that requires minimal energy (besides some up-front work), here are seven easy money moves.
1. Start Contributing to a 401(k) (or Other Employer-Sponsored Retirement Account) If you want to start saving and investing for retirement, find out whether your employer sponsors a retirement plan, like a 401(k). These accounts provide tax breaks that allow you to save more money for retirement. Further, many companies offer matching contributions, giving employees incentive to save. These two benefits make an employer-sponsored account (if you have access to one) the logical starting place when saving for retirement.
To contribute to a company retirement plan, you must choose how much of your paycheck to invest each pay period (usually as a percentage of your salary). You want to contribute at least as much to earn the full company match to earn as much free money as possible (but you can contribute up to $19,500 in 2020).
You also must choose your investments. Our research can help you make choices from your plan's menu (in other words, the list of all your retirement plan's investment options). If you want to minimize the workload here, see if your plan offers one of our favorite target-date funds, which takes all the investment decisions off your plate.
One more note: Your employer might offer both a traditional and Roth 401(k). The tax benefits are structured in different ways; Karen Wallace discusses what you should consider when deciding between them.
2. Open an Individual Retirement Account An individual retirement account is another good option for retirement savers. You can open an IRA yourself, and it offers similar tax benefits to a 401(k). There are two main types of IRA, and the choice between them often hinges on whether you are eligible to reap the tax benefits and whether you would prefer to pay tax on the money now (for a Roth IRA) or during retirement (for a traditional IRA). (For more on this, see "Roth or Traditional IRA: Which Should You Choose?")
IRAs also have the benefit of allowing access to a much broader selection of investments, making them suitable for those who dislike their 401(k)'s menu. (Though as Christine Benz writes, a lousy 401(k) plan is still worth contributing up to the company match.)
With more choice comes complexity, however: Instead of selecting from a list of limited options on a 401(k) menu, you have countless investments to choose from. The task of choosing your investments is much easier with the help of our research, and if you're still scratching your head, Benz offers some suggestions for IRA investors.
You can set up automatic contributions (similar to how 401(k) payroll contributions work) to make saving very simple. Set up the transfers to automatically pull money from your bank account at designated periods and move it to your IRA. This feature minimizes ongoing work after setting up the account. (Just ensure your yearly contributions don’t exceed the $6,000 maximum annual IRA contribution limit, $7,000 if you are age 50 or older.)
3. Increase Your Retirement Savings Rate Financial planners often recommend saving 15% of your salary for retirement. Many people aren't saving this much, especially if your company automatically enrolled you in its plan: The most common default contribution rate is 3%, according to a Fidelity report. If your contributions plus any company match land below 15%, raise your savings rate, ideally to this threshold.
That's easier said than done, so if you're having trouble making that jump, some employer-sponsored plans offer a feature called autoescalation. This feature increases your contributions by a set amount--usually a percentage point--annually until you reach a savings percentage target. (Read more about autoescalation in "5 Ways to Maximize Your 401(k)".) If your company offers autoescalation, consider setting it up for an easy money move. If your 401(k) doesn't offer it, or you're investing in an IRA, increase your savings rate yourself. (To go the extra mile, set an annual reminder to bump up your contributions by the same percentage each year.)
4. Set Aside an Emergency Fund An emergency fund is cash on hand that you can turn to in financial emergencies, including unemployment or a large medical bill. These unlucky circumstances can happen to anyone, so everyone should have an emergency fund. While three to six months' worth of expenses is the rule of thumb, the right amount for you may fluctuate depending on your circumstance. Young investors juggling other goals like retirement might start with half-a-month to one month's worth of expenses, says Maria Bruno, Vanguard's head of U.S. wealth planning research. On the other end of the spectrum, Benz suggests that sole breadwinners in families, people with high fixed living costs, or those working in highly specialized fields might consider keeping nine to 12 months of living costs.
5. Cancel (or Pause) Unwanted Recurring Subscriptions If you want to reduce spending, consider combing through your bank account and credit card transactions to identify and cancel unwanted recurring subscriptions. You could save $240 this year by cutting just $20 in monthly unused subscriptions.
If you're looking to further reduce subscription costs, pause or temporarily cancel underused media streaming products. They're easy to reactivate, so you can always turn them back on temporarily once there's a show you want to watch. As more companies enter the streaming wars, this helps you access many content catalogs while paying only for those you're actually using.
6. Save your Bonus or Tax Refund Many people receive a tax refund or bonus early in the year, and saving it is an easy way to get ahead on a financial goal.
You'll be forgiven if you think this sounds easier said than done, but behavioral changes might help you actually do it. As Sarah Newcomb explains, we often struggle to save windfalls because of our own mental accounting, or how we assign different meanings and purposes to different sources of money. We view windfalls as found money that's a treat because it exists outside our regular budget, so we categorize it as spending money. Newcomb recommends that we instead view windfalls as found financial protection, which can boost our long-term wealth if consistently saved. (And if you think about it, your tax refund isn't really a windfall; it's just a return of the money you earned and then overpaid to the government.)
If you’re still struggling to rewire your brain, compromise with yourself and split the lump sum into savings and spending portions.
7. Calculate Your After-Savings Discretionary Income One of the main goals of budgeting is to figure out how much of your take-home salary you can spend on nonessential purchases--such as dining out, travel, and books--without getting into trouble by overspending.
Here's how to calculate this figure. Take your monthly income and subtract nondiscretionary expenses, like housing, utilities, groceries, and insurance. Then, subtract money set aside for saving and investing goals, like IRA contributions, an emergency fund, or a house down payment. (This budget worksheet can help.) You should carve out your savings and not lump it in with discretionary income; savings is the priority that your spending should work around, not vice versa, as Benz advises.
Look at what remains and ask yourself whether it's enough to fund your desired lifestyle. If not, determine how you can decrease spending, either from fixed or discretionary categories. Of course, you can guarantee that you're staying within your discretionary income limits only by tracking your expenses, which can be a time-consuming habit. But hopefully this exercise helps you set spending expectations and encourages you to start tracking your spending. (For more, read "How to Assess Cash Flows and Create a Budget.")