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Last February, I wrote an article titled, “Our Saving Process.” In this article, I dove into 7 steps that we look at when creating our savings plan. The 7 seven steps in our savings process:
Make A Decision
Automate Your Retirement Savings
Set a Maximum Savings Number Each Month
Pay Yourself First
Complete Your Budget - Throw Any Extra Money at Savings
Find a Budgeting Software that Works for You
Adjust as Needed
If you have time, give that article a read. It gives a great general listing of the simple steps to begin saving money every month. However, today’s article is not about the simple steps to saving money. This article focuses on the steps that we have taken to increase our savings this year ($44,000 last year to approx. $60,000 this year).
With two kids in the house and both of them in daycare, I was really expecting our savings to decrease. However, we have taken some huge steps to make sure that our savings has the ability to increase this year.
I mentioned a little bit about our changes at the beginning of the year, but I will refresh your memory. Last year, our focus was mortgage payoff. We didn’t focus as much on retirement savings or taking advantage of tax deferred accounts. This year, however, we have made a change in our plan. This change has allowed us to increase our savings by utilizing tax-deferred accounts.
By utilizing tax deferred accounts, we have lowered our tax liability (amount we pay in taxes). By lowering our tax liability, we can save more, because we are paying less in taxes! It’s a win-win in my book, because I keep more of my hard earned money with myself and I send less money to the government.
Don’t get me wrong, I am not against paying taxes, but I am for using programs that are set up for us. These programs were created to benefit the people in the middle class. They were set up to help us, so use them.
Below is a list of steps that we took that helped us increase our savings over the course of the year. To do this, we did make some changes increasing some accounts, but we also decreased some accounts. There are reasons that decreasing made sense and I talk about each account below.
Increase #1: 457b Accounts
I had known that my wife’s work offered a 457b, but I never took advantage of the account. The account is referred to as deferred compensation, which I thought was like a comp time bank of money or something. I didn’t understand that you could invest in a 457b, just like a 401k or 403b.
After discovering this fact by listening to the ChooseFI Podcast, I automatically made a change. The first change, we began putting 20% of my wife’s income in her 457b to end 2018. We continued this aggressive savings into 2019 as we are planning to max out her 457b account.
The next step we took was opening a 457b account through my work. I was not able to begin investing in the account until December, but we began investing $800 a month into my 457b. We continued investing this much into my account in 2019.
These two simple changes and increases will allow us to save $19,000 in my wife’s 457b and $9,600 in my 457b. This amount totals to $28,600. This is the single biggest change we made in 2018. We still have room to grow as we are short of maxing out my 457b in 2019, but you have to start somewhere.
Increase #2: Dependent Daycare FSA
I don’t know why I didn’t jump on the dependent daycare FSA earlier, but this account allows you to save money for daycare expenses that are tax deferred. Therefore, essentially making your daycare expenses cost less because you are not paying taxes on the amount used for daycare expenses.
My benefits run from September to August, so we began maxing out the dependent daycare FSA in September. I calculated that the savings from using this account is approximately $100 a month. It may not seem like a lot, but when you spend approximately $2,000 each month on daycare a $100 dollar savings anytime is great!
I max out $5,500 of dependent daycare expenses over the course of the year. However, I do not count this amount as money we save, because we use the money every month to help offset daycare expenses. Therefore, I just count the savings of $1,200. This is the amount that we save by using a tax deferred account to pay for expenses tax free.
Increase #3: Healthcare FSA
The Healthcare FSA works the same way as a dependent daycare FSA. The money saved from saving pre-tax money then can be used for any medical expenses. I have not maxed out these accounts, but I probably should have the last two years as we have used the entire amount elected in 2018 and 2019.
This year, we increased the Healthcare FSA from $1,200 to $2,400. On a side note, my wife’s profession does not offer a HSA and neither does my employer. Therefore, we were stuck with the FSA, but if you can use the HSA, USE IT!!!
Decrease #1: My Wife’s 401k
With our current budget and expenses, I was not able to find a way to max out my wife’s 401k. Thus, we decreased the amount from 7% to 6%. Now this is not a huge change, but we went from taking 7% total out of my wife’s paycheck in 2018 to a total of 26% in 2019 (includes 457b and 401k). That is a huge change. Therefore, to offset a little bit of the increase that was given to the 457b, we took a percent away from the 401k.
Luckily, my wife’s company matches at 5%. This allows us to essentially save 11% of my wife’s income in the 401k, while saving 20% of my wife’s income in her 457b. This will essentially allow us to save $11,586 in 2019 (including the match).
Decrease #2: My 403b
Just like with my wife’s account, we decreased my 403b account, because of our goal to focus on savings in our 457b accounts. I made a small decrease from $300 per month to $200 per month.
At $200 a month, I will be saving $1,200 in my 403b this year.
Decrease #3: Mortgage Payoff
Last year, we pushed to payoff $20,000 of our principal balance in 2019. This year, we are decreasing this number to $12,000. With our main focus moving towards retirement savings, the housing payoff goal took a hit. However, $12,000 paid off the house in one year is not bad at all.
No Changes: General Savings
During each month, we make sure to save a decent amount of money into accounts for emergencies, college funds, new car funds and vacation funds. We kept the amount that dumps into these accounts the same, because we want to make sure that we have the money for those things in the future.
Which one makes the biggest difference?
Throughout the reading of this article, you probably figured out that our biggest change was our decision to start investing in the 457b account. However, it’s more than just investing in the 457b, but it’s the fact that we are bringing in less income to use now. Instead, we are investing in pre-tax accounts.
By investing un pre-tax accounts we gain a big advantage in three ways. First, the money is pulled directly from our account and we can’t use the money. This is huge, because when money is out of site, it doesn’t get used. Secondly, we save on taxes, because we are bringing less home. Less money in our paycheck equals less taxes!
Lastly, our need to budget is even greater now. In the past, we could be a little lax with our budget, because we always had extra money. Now, with the extra pre-tax investing, we have less money coming into our bank accounts. We need to be more diligent and the extra pre-tax investing has helped us cut our expenses by default.
It really is simple, be bold with your pre-tax savings and you will inevitably begin to save busloads of money more each month!