Winter savings is about more than finding huge savings on Christmas decor. It’s also about finding your financial sweet spot for the new year.
As the year comes to a close and you’re filling our holiday stockings and whipping up festive goodies, it’s also a time of year to re-evaluate your winter spending. Are you making the most of your savings?
Create a little checklist to see if it’s time to pull the brake on those pumpkin spice lattes and top up the retirement fund instead.
Got a tax consultant? Call them up and start discussing the tax advantages of maxing out your health savings account (HSA).
If you’re covered by a high deductible health plan (HDHP), you’re in the running for an HSA. Sure, there are a few financial hoops to jump through but if you know you can max out your HSA every year, this is a good place to throw those extra dollars.
The benefits? You get a tax deduction on the contribution and no penalty for withdrawal as long as you use those funds for approved medical expenses (or qualified health insurance premiums for those over age 65). What's more, you can keep rolling over the balance for years until you need to use it.
Annual contributions are capped at $3,600 for an individual or $7,000 for a family. When you reach the age of 55, there’s an additional $1,000 catchup allowance.
Free money. That’s how you need to look at your retirement contributions, especially if your employer matches.
Employer-matched contributions can be a percentage of your contribution, for instance, 25% or 50%. That means if you contribute 4% of your salary and your employer matches 25% of that, they contribute 1% of your salary's value at no extra cost to you.
When your employer is willing to match your retirement contributions, this is the first place you look to max out. This is because you’re earning additional funding for your retirement. That means if you contribute 4% your employer also contributes 4%. On a $100,000 salary, that's an extra $4,000 going to your retirement savings each year.
The next retirement item to look at is maxing out your traditional or Roth IRA. There are tax advantages to contributing to a retirement plan that isn’t available in other investment products (except the HSA, of course). Those under the age of 50 can contribute up to $6,000 per year and over-fifties can contribute up to $7,000 per year.
List your credit cards from highest to lowest interest and calculate how much you would save by paying off the highest interest items faster. If you’re not in the habit of squaring off your credit card every month, this is a good place to start.
If you happen to carry a high balance on your credit card, it’s worth looking to switch it over to a 0% interest card. Here’s what you want to look out for:
If your highest debt is student loans or personal loans, then look at paying a little extra each month to bring it down faster. You can save a ton of interest even by contributing just $50 extra per month. For example:
On a loan of $20,000 where the monthly payment is $250 and the interest rate is 6%, an extra contribution of $50 will save you $1,216 in interest and shave a full year and nine months off the term.
Every once in a while, it’s worth reviewing your investments to make sure you’re still on track and your portfolio allocation still represents your financial plan. For instance, if you decided to contribute to certain funds or investment products, your winter savings check is a good time to see whether those percentages still hold.
It's also important to check in with yourself. Is your risk tolerance still the same? Or do you need to adjust things to better match where you are in life? Those close to retirement might want to move their funds into more conservative asset classes to protect their capital. If you have more time to weather higher-risk assets, go for it!
Financial pundits recommended that you keep around 3-6 months’ worth of expenses in an easily accessible savings account for emergencies. Some even suggest you boost that figure to 12 months. We all know that anything can happen! (Here's looking at you, COVID).
Keep this money separate from your main account so you don’t accidentally use it for everyday expenses. Also, you want to make sure it’s in an account that carries no risk. While the interest these accounts earn is nowhere close to what you could make off an investment, you don’t want your emergency savings anywhere near financial risks.
Once you’ve reached that 12-month cap, stop. You’re better off investing after this point as no savings account will offer a rate that beats inflation. If too much of your money is in savings, you end up losing value on those funds.
You want to get some of your wealth to your loved ones without creating a tax liability. If you have small kids or grandkids, contributions to a 529 plan are included in the exemptions. The annual rate as of 2020/2021 is $15,000 per beneficiary. While you will still need to complete a gift tax return, you won’t need to pay taxes on gifts up to this amount.
There are tons of smart money moves that can help put more money in your pocket while still providing for the future. Things like maxing out retirement and health savings, earmarking emergency funds, and strategically setting up your nearest and dearest are all super-smart money moves to make this winter.
Want to save more money? Look inside your Save mailer for coupons and deals on all the everyday essentials you love.
