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How to Save for Retirement When You are Short On Cash

One of the best methods of saving for retirement with little money is an IRA or 401(k) through your employer. In this fashion, you are saving small amounts of money, and receiving a tax break on it, without ever having touched the money. You are also taking advantage of dollar cost averaging. Dollar cost averaging is the single most effective way of ensuring your dollar is doing the most good. When the share price of your funds, or stocks, is down, you buy more. When the price is up, you buy less. Over time, if you compare the price you paid per share against some one who just invested a lump sum at one time, you would have a much better chance of having paid less per share. Another positive factor of doing it this way is that you receive a tax break on the money, reducing your taxable income by the amount of your contributions.

If your employer doesn't offer these programs, most financial advisory firms will offer them, and at a more reasonable minimum contribution amount than you'd think. If you'd prefer, you can also open a savings account at your local bank or credit union, but be aware of the following:

1.This approach will be a mixture of taxable and not taxable depending on how you do it. A savings account will gain interest which is taxable income in the year you receive it.

2.You will need to exercise enough control to not touch the money.

You can however set up automatic transfers of any amount from one account to the other, with no minimums. After it reaches an amount you've predetermined, you can transfer it into a sheltered retirement account and the amount you contribute will then be tax deductible.

Speaking of taxes, most folks get tax returns. Put them away. Don't spend it. You should also sit down and review your finances. Most folks can find at least $100.00 going to something frivolous. Lastly, don't rule out life insurance. A good term policy with return of premium on a relatively health individual, can be fairly inexpensive. At the end of the term, providing you outlive your policy, you get the money back, in many cases tax free.

Learn more about this author, Christopher Johnson.
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