For some people, deciding how to invest is the hard part. But for others, finding extra money to put toward investments is even harder. You know investing is important, and you know the more consistently you do it, the better off you’ll be over time. Luckily, there are steps you can take to make that easier, without having to shake out your sofa cushions for spare change. Financial planners point out that many folks have budget leaks—unnecessary or redundant expenses that they may not even notice. Stanching this needless flow of money can give you a painless way to invest more—and reap the rewards of consistency and long-term compounded returns. Here are some ideas to get you started:
Draw up a budget or cash flow worksheet
Regardless of how much money you earn, creating a spreadsheet of your monthly income and expenses is a practical step to building wealth. Once you write out what your monthly flows are, you can dig deeper into specific categories. This is where you may find routine consumer expenses, such as memberships, services, or subscriptions that you no longer want or need. Cutting such expenses can free up more cash for investing. Cash flow worksheets are especially helpful for people with higher incomes, who may have more complex finances, which are harder to track.
Fine tune your investment expenses
If you don’t know the full extent of your exposure to investment expenses, you’re not alone. These costs can be a combination of management fees, internal expenses of mutual funds and exchange-traded funds (ETFs), and commissions or trading costs associated with managing a brokerage account. You may need to look into your various funds and portfolios to assess your full exposure to expenses. The point of this exercise is to modify your strategy so that you still have the market exposure you seek, but without all the fat. If you have a $100,000 portfolio and you manage to cut out $800 of annual fees and expenses, that’s $800 more that can grow and compound in the market. Over a long period of time, that could make a big difference.
Factor in tax consequences when deciding where to invest your money
If you are able to invest on a pre-tax basis through a retirement plan such as a 401(k) or IRA, consider the potential benefits. Not only might you reduce your taxable income, but you might also be able to take advantage of tax-deferred growth until you take withdrawals, presumably when you are older, retired, and in a tax bracket that may be lower. In your taxable accounts, you may be able to find tax-efficient investments, such as municipal bonds, REITs, or MLPs, which have the potential to provide tax benefits as well. Giving thought to taxes may help you keep more of your money, which can be used to increase your monthly budget for savings and investment.
Consider taxes when deciding where to spend your money
Along similar lines, there may be certain purchases you make that could reduce your taxes through available credits and deductions. One major example would be a home, which may offer deductible mortgage interest. If you’re self employed, read the IRS guidelines[1] about business deductions to see if certain purchases you make for the business could reduce your income for the year. There are also tax credits for energy efficient purchases and improvements, such as solar energy systems and geothermal heat pumps. If you can reduce your taxes through the purchases that you make, that could also free up a bit more cash to invest.
Take a good look at your mortgage with someone who understands it
People often take the longest mortgage they can find (30 years) because it creates the lowest monthly payments. That strategy may be helpful if you have an attractive interest rate, the interest is tax deductible, and the low payment allows you to sock more money into your retirement and after-tax accounts. However, if the extra cash is sitting in a savings account earning nothing, or being spent on extras, you may be better off paying down additional principal on your loan. Because home payments are often a major monthly expense, a careful analysis may be warranted.
Regardless of how you do it, the point of these exercises is to improve your focus on one of the primary ways to build wealth: routine, systematic investing. If you can find ways to squeeze an extra few hundred dollars each month into your IRA, 401(k), or other after-tax accounts, those funds could go a long way towards padding your retirement nest egg or other investment goals.
[1] Deducting Business Expenses, http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Deducting-Business-Expenses
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