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Wednesday, February 2, 2011

How to save for retirement when you are short on cash

Save for a supplemental income after retirement
Maintaining a consistent income helps stabilize savings
Saving for retirement when you are short on cash can be accomplished even with a small weekly or monthly cash inflow. Ideally, in order for a saving method to work, some financial conditions must be met such as commitment to a budget and savings plan.

Even when this is not possible however, there may be ways to redirect cash flow in such a way that it increases monthly savings; for example loan consolidation, adjustments to living space, cost budgeting etc.

Saving for retirement when one is short on cash may seem impossible but it doesn't have to be. The following tips may assist in learning how to save for retirement when you are short on cash.

Select an annual financial goal


Finding an amount that is affordable, and sticking to that goal from January 1 to December 31 of every year until retirement is crucial to success in this retirement savings plan. The following numerical breakdown will illustrate an example goal of saving $2000.00/year and how much money is required to be saved each day for that goal.

To save $2000.00 one must contribute $166.67 per month. If one has an income of just $250.00 per week that is 16.67% of one's monthly income. After 10 years of savings this amount becomes $20,000.00 with no interest. Theoretically, this may be easy to do, but it is not. Don't be fooled by mathematical wizardry because life pays no attention to formulas, plans or compounded interest.

Account for overlooked expenses in a budget


When saving for retirement when short on cash, overlooked expenses can all too easily be figured into a budget without realistic inclusion. Expenses that are foreseen and unforeseen can effortlessly eat away at retirement plans and budgets on a daily basis. These expenses are not always of one's choosing and have the ability to cause one to give up on a budget and stop saving. What's more, such expenses might come around just as one is about to put the money into the savings account. A few of these expenses may be related to the following events:

i) Medical co-pays, and dental work
ii) Frivolous habits and spending patterns
iii) Budget breakers such as car accessories, car repairs, home maintenance costs
iv) Uncontrollable household expenditures arising from family 'needs'

In a savings plan one might be better off simply adding 10% to whatever the monthly budget to account for unwanted or unplanned expenses. These expenses are simply a fact of life and should not be ignored, even when one is short on cash and saving for retirement. The budget is also important. Establishing and creating a realistic budget that fits with one's income may take some financial ingenuity, material forfeiture and skill.

Establish a household financial democracy


An organized household budget that saves for retirement when short on cash takes discipline, consistency and sometimes may involve sacrificing certain wants. In order to save money, it is commonly understood, one must generally without question, live within one's means. That may be easy enough to say and do independently, but convincing a whole household to do that is a great feat indeed. Essentially, each household might be best off with a comptroller or money manger who has veto power on all democratically arrived at expenditures. Without an organized and agreed upon saving plan, a budget may not survive and the retirement plan goes out the window.

Prepare for an inevitable financial catastrophe


Even with a 10% unexpected expense budget, the inevitable financial catastrophe lies in wait, hiding in the dark corners of life waiting to feed its insatiable hunger on the finite pocket books of its victims. Knowing how to save for retirement when short on cash also involves dealing with a potentially inevitable financial catastrophe is very important to saving for retirement because it has the power to cause one to lose all hope in one's saving plan if it strikes.

In its most horrific and unpleasant form, the inevitable financial catastrophe can wipe out everything one has saved for retirement and this is simply unfortunate. However, there are means and ways to fend of the inevitable financial catastrophe such as the following:

i) Save an additional 2% every month for the Inevitable Financial Catastrophe
ii) Make financial sacrifices each month
iii) Place the above financial sacrifices in an untouchable savings account
iv) Do not, under any circumstances other than the Inevitable Financial Catastrophe, touch the money in the untouchable bank account

Using the example from paragraph two of this article, one must now save 19.67% of one's income to account for the inevitable financial catastrophe. That leaves just over 80% for the budget. In order to save according to the above example plan, 80% is all one has to live on. Take it or leave it.

Knowing how to save for retirement when you are short on cash can be assisted with a financial plan. Financial plans are many, and many of them are based on sound principles. However, the added component of real life has an astounding ability to thwart all but the most dedicated and disciplined of savers. In order to save when one is short on cash, one must simply stick to a budget, live within one's means, and save.

The above savings plan is an example of how one can save $2,000.00 a year on a small income of $250.00/ week not including budget details. Creating and sticking to a budget that works is a unique and personal endeavor that requires financial fortitude, and fiscal discipline but it can be done in varying amounts with consistent income.

Image license: 401(K) 2012, CC BY-SA 2.0