Let's face it: Most of us could be doing a better job with our finances. Whether you need to set more money aside for your future, watch your spending from here on out, or get your debts under control, there is usually room for improvement. We asked our contributors to suggest five ways our readers could save money in 2016, and here's what they had to say.
Selena Maranjian: One way to save thousands of dollars in 2016 is to make good use of retirement accounts. Most of us can enjoy tax breaks by contributing to traditional IRAs and 401(k)s. Our contributions are made with pre-tax dollars, and for 2015 and 2016, the contribution limits are $5,500 for IRAs and $18,000 for 401(k)s (with an extra $1,000 and $6,000 allowed, respectively, for those 50 and older). Thus, if your taxable income is $60,000 and you contribute $10,000 to these accounts, your taxable income is reduced, to $50,000.
If you're in the 25% tax bracket and you avoid paying $10,000 in taxes in 2016, you save $2,500! If you're able to be more aggressive, and contribute $20,000 to these accounts, you can save a whopping $5,000. Better still, your contributions will go to work for you, and will, ideally, grow over time. Most of us need retirement savings accounts to draw on in retirement, so using IRAs and 401(k)s is a smart thing to do.
It's not a no-brainer thing to do, though. There are a few more considerations. For one thing, understand that traditional IRAs and 401(k)s let you save tax dollars up front, but you do get taxed eventually -- when you withdraw your money, typically in retirement. At that time, the money is taxed at your ordinary income tax rate, which is often lower in retirement than when you're working.
So also consider the Roth IRA and the Roth 401(k), which accept post-tax money (i.e., they don't reduce your taxable income for the year of contribution) but are designed to ultimately let you withdraw your money in retirement tax-free. Opt for them and in 2016 you can set yourself up to save thousands in future years.
Sean Williams: As we dive headfirst into 2016, one of the smartest money moves you can make, which may be able to save you thousands, is to take advantage of 0% interest, or low-interest, credit cards while you have the opportunity to do so in order to pay down whatever credit card debts you may owe.
According to a recent NerdWallet report, the average U.S. household carries a whopping $15,355 in credit card debt; and based on the latest weekly reading from CreditCards.com, the average APR paid on a credit card is 15.07%. These figures imply that the average household is on track to pay in excess of $2,300 this year in credit card interest. Understandably, what you pay will depend on your credit history, credit score, and other variables, but this is money that can be put to better use.
While I'm not a huge fan of suggesting that heavily indebted people open a new credit account, I believe opening an account with an extended special offer of 0% APR (say 12 or 18 months), and transferring your interest-bearing balances to your new account, could help save you thousands in 2016. Instead of paying $2,300-plus in interest, you can take that money and apply it, dollar-for-dollar, toward your debt. Historically low lending rates have allowed credit card providers to offer these extended periods of 0% APR, but as lending rates rise you may find these offers to be fewer and far between. Consumers who have this option available probably won't want to sit on this idea for too long, otherwise those special APR deals may disappear.
Jordan Wathen: The single smartest thing I think anyone can do is review their spending on recurring expenses at least once each year.
While we remember the $15 bag of popcorn we bought at the movies, it's very easy to forget about routine charges for things like auto and home insurance, club and gym memberships, and bills for cell phones and cable. The best part about shaving even a very small amount from a monthly expenditure is that the savings are recurring, month after month and year after year. Cutting $25 off a cable bill isn't just a small, $25 victory, it's a $300 annual triumph.
Take the time in 2016 to look at every single recurring expense with a fine-tooth comb. Shop around for big purchases, particularly things like insurance, cable, and cell phone services. I'd be surprised if the average person couldn't identify at least $1,000 in waste, particularly if they haven't shopped around for major recurring purchases in several years.
Dan Caplinger: One of the biggest financial obligations you'll ever carry in your lifetime is the mortgage on your home, and taking advantage of low interest rates on a mortgage loan will definitely save you thousands of dollars over the decades you spend paying it off. Yet even though interest rates have been extremely low for years, some homeowners still haven't taken advantage of the opportunity to refinance their mortgages. The result is monthly payments that are hundreds of dollars higher than they need to be or missing out on the chance to replace an outstanding 30-year mortgage with a new 15-year loan.
To be fair, there are good reasons why some homeowners haven't refinanced their mortgages. Some haven't been able to refinance, as they've worked to get out of negative equity situations in which they were underwater on their mortgage loans. Others haven't been aware that they might qualify for special government programs designed to help struggling homeowners find refinancing options that otherwise might not be available to them. Regardless of the reason, though, now is a great time to look and see whether you can save on your mortgage. With rates likely to rise now that the Federal Reserve is tightening monetary policy, you might not get a better chance than you have now to save money on a refi.
Matt Frankel: While it may not be the most immediate way to save money, one of the best things you can do over the long term is to work on maximizing your credit score.
In fact, most of the other money-saving suggestions mentioned here depend on your credit to some extent. As Dan said, refinancing your mortgage can be a great idea, but to get the best interest rate, you'll need a high credit score. And if you have bad credit, Sean's suggestion of using a 0% APR credit card offer to your advantage may not even be an option for you. Finally, good credit can help reduce some of your other expenses like Jordan mentioned, such as insurance premiums and deposits on utilities and cell phones.
Aside from obvious solutions such as paying all of your bills on time, there are plenty of other ways you can boost your credit. Just to name a few, here are a couple you may not know.
- 30% of your FICO score is based on "amounts owed," which emphasizes your debt relative to your credit limits. So, by using Sean's suggestion of opening a new card, you could improve your debt utilization and potentially boost your score, assuming you don't make any new charges.
- 10% of your score is based on your "credit mix" -- that is, the variety of credit accounts you have. So, if you have an auto loan but no mortgage or credit cards, it could actually hurt your score. Having several types of accounts is a good thing, even if you don't use your credit card(s) much.
The point is that there are plenty of things you can do to improve your credit, and doing so can save you tons of money in the long run.