Investing for retirement when you can barely afford to live now

by Jen (March 20, 2008)

Now that I’m out of debt, saving for retirement is my big concern. If you’re trying to sort through Roth IRAs and traditional IRAs and 401ks and so on, there’s a discussion over at Get Rich Slowly that you should check out. It doesn’t exactly clear everything up - I don’t think anything short than several years of college could do that for most of us (why does it have to be so complicated?!) - but it is informative and full of contradictory opinions which remind you you’re not the only one who’s confused.

This got me thinking about the savings options available to people who are barely making ends meet (yes, I have been there). For some of us, there really are periods in life where we can’t save a penny because we’re going into debt just buying necessities. The good news is that very few people will be in that situation their whole adult lives if they recognize the opportunities they have to save. The trick is to save when you can and love doing it.

If you think IRAs and 401ks are for people who earn more than you or work for employers who set up that stuff for them, think again: you can open a Roth IRA with $1,000 at most firms. Don’t have $1,000? That’s okay:

1. Put what money you can save into a savings account. Some banks have a high minimum amount you have to put in to open a savings account. Shop around for one that’s within your reach. If there isn’t one, stick the money somewhere in your house.
2. Keep adding to that fund, and never remove a penny unless someone’s life is at stake and there’s absolutely no other money available to you. I mean it! Don’t touch it unless it’s life or death.
3. When that fund is big enough to start a savings account, put it in. If it’s already in, then as it grows look for banks that will give you bigger interest rates and move it to them.
4. When that savings account is big enough to put into an IRA or whatever retirement fund you can find, do it. It might take you years if your financial outlook is really bleak, but you can do it.
5. CDs are another option to consider. Lately, the ones I’ve looked at had a worse interest rate than regular savings, and some of them require $5000 to start! But this won’t always be the case as the economy fluctuates. If you have access to a CD option that’s worthwhile - or you want the advantage of having your money somewhere you really can’t touch it for a few months - CDs can help.
   

Step 2 is really important. You need to maximize your savings by being frugal. Any birthday checks you receive, any little windfalls, any bonuses at work - any money you weren’t expecting and didn’t budget- needs to go into this fund. There may be times when this isn’t possible - the car needs repaired and you can’t just take a bus or bicycle - but always make it your goal. If you learn to love saving - love seeing that interest every month on your money, love knowing it’s there - you’ll find opportunities to save. It may sound sad to you, but when I get a little windfall, I’m excited to deposit it straight into my savings account (which is going to be a downpayment on a home someday soon).

Other savings strategies that work, even when you’re desperate:

• When you pay cash in stores, always pay in bills only and save the coin change from each transaction. You won’t save up much money this way - maybe $100 a year - but you won’t feel the crunch at all because of how it’s spread out over so many transactions. This exercise can boost your love of savings, even if you don’t save much.
• Take a dollar out of your wallet every day and put it into savings. That’s $365 a year.
• Have your bank automatically take part of your paycheck and stick it in savings. Or if you have a savings account through INGDirect (better interest rates than any offline bank), you can authorize them to automatically take a few dollars out of your offline checking account every week or month (you choose how often and how much). Even just a few dollars a month ads up over time. And you’ll be earning interest on it the whole time.

No matter how strapped and frustrated you are right now, remember it won’t always be that way. If you learn the right habits and manage to save anything when it’s really bad, think how much you’ll save when times are better.

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