January border

Dear Clients and Friends of Cornerstone:

If you’re looking for ways to cut costs and save money in 2016, you will find nine ideas below along with links for additional information. Certainly cutting back on general spending is one of the first things that comes to mind, but author John Wasik reminds us that there is an art to saving money for those unexpected life changes.  He will demonstrate that a little research can make all the difference in meeting your savings goals.

If you would like to refer back to any previous newsletters we have published, you can find them on our website.  Please be sure to visit www.ccadvisors.com.

– Cornerstone Capital Advisors

Improving Your Finances: 9 Ways to Save More and Spend Less in 2016

Fully funding some accounts, cutting fees, and conducting a spending audit are just a few ways to save a buck next year, says contributor John Wasik.

By John F. Wasik

When it came to saving money, my wife always thought I was borderline obsessive. I built up several savings funds in stocks, cash, and bonds. When a health and job crisis gobsmacked us a few years ago (at the same time), my wife’s observations turned into praise.

There’s an art to saving. Many will focus on filling “buckets” for retirement, college, short-term spending and emergencies. That’s a convenient way to look at it. Or, if you’re near or in retirement, you may just focus on spending less by saving more on daily living expenses.

Here are some tried-and-true saving strategies for the coming year.

Fully Fund Your Retirement Plans
This is still one of the best saving strategies around. For 401(k)s, you get a tax break on contributions, although you’ll pay taxes when you withdraw the money. If you’re concerned about taxes on withdrawals, fund a Roth IRA or Roth 401(k), which only taxes contributions, not withdrawals. For 2016, you can invest $18,000 into a 401(k) and $5,500 into a Roth IRA. If you’re over 50, you can kick in an extra $1,000 a year as a “catch-up” contribution to an IRA and $6,000 for 401(k)s, 403(b)s, 457s, and the federal government’s Thrift Savings Plan.

Fund Your Health Savings Account (HSA), If You Have One
Although this is perhaps one of the least-promoted ways to save, you can tuck away $3,350 for an individual and $6,750 for a family in this special account, which was designed to cover out-of-pocket health expenses for people in high-deductible healthcare plans. You can add another $1,000 annually if you’re over 50. This is a real sleeper of a savings account with great benefits. The contributions are tax deductible and the withdrawals are tax-free when used for qualified medical expenses or health-insurance deductibles. And if you don’t use the money? You can keep the funds in the account, and it grows tax-deferred.

Use Your Flexible Spending Account
The FSA is a great tool to save on everyday expenses like commuting and medical expenses. But you have to sign up with your employer this time of year to take advantage of it, which allows you to squirrel away up to $2,500 per person annually. Unlike the HSA, though, this is a “use it or lose it” benefit, meaning you must use the money within 15 months of deposit.

Reduce Your Banking Fees
Many can save in this area, since banks have been raising fees across the board on nearly every service in recent years. Greg McBride, an analyst with Bankrate.com, has found in his research that although only 37% of banks offer free checking, “a majority of them will waive fees if you have direct deposit.” That means depositing your paycheck or Social Security check directly into your checking account. Want to save even more? Check out credit unions, which feature an array of low-cost services: 72% of them offer free checking, McBride has found.

Cut Your Brokerage Fees
Managing your own portfolio? There’s no reason to pay top dollar for brokerage services if you’re doing your own research, buying, and selling. There’s tremendous competition among “deep” discount brokers, who charge less than $5 per trade. McBride says you can easily find a host of brokers who charge less than $10 per trade, which should be your benchmark for tracking down discounters. If buying individual stocks, look for companies that offer Dividend Reinvestment Plans or DRIPs. Once you sign up, you can not only reinvest dividends in new shares, you pay no commission on them. For a guide to DRIP plans, click here.

Limit Your 401(k) Fees
Even if you’re retired–and your money is still in your employer’s 401(k) plan–you could be paying too much in retirement-plan fees. Middlemen charge you management fees, which is embedded in a fund’s annual expense ratio. There are also administrative and bookkeeping fees. How do you know if you’re paying too much? As a rule, actively managed funds will charge you the most–some 1% annually or more. Passive index funds are typically the best bargains, charging only a few basis points. Target-date funds can be another low-cost approach to creating an entire portfolio. You can vet your fund expenses using Morningstar’s fund reports. Don’t like your former employer’s plan? You can always move your money into a rollover IRA.

Save on Insurance
Treat your ongoing insurance expenses the way a business would: Look for better rates every year. That means shopping around for the best premiums on auto, homeowner/renter, as well as life and health policies. One general rule that holds true for maximum savings: The higher the deductible or out of pocket, the lower the premium. (Of course, if you go with a higher deductible, that means you’ll have to save more to cover a loss that’s not insured.) And look for discounts: Nonsmoking, healthy people get the best rates on life and health policies. For your home, you get breaks if you have smoke detectors and alarm systems. On auto policies, if you have older vehicles, you can drop collision coverage (we do this for our 20-year-old clunker). To find the lowest premiums, you can either use online search engines, such as SelectQuote, or use an independent agent who represents several insurers.

Conduct a General Spending Audit
While you can do this anytime during the year, a general checkup on spending items can be best accomplished in the winter months. When we did our audit, we looked at everything and found we could save thousands of dollars. Look at your biggest-cost items first. We appealed our property tax assessment, for instance, which could yield thousands in savings depending on your property value. Then, we looked at our telecom expenses: cellphones, landlines, and Internet. With four cellphone users in our household, we dropped one of our landlines and switched providers to get a better monthly rate. We were spending more than $3,000 a year on these bills, and we expect to pare that expense by more than one third. By examining our credit card and debit accounts, we also discovered we were spending too much money on food. We adopted a food budget and limited our shopping to once a week and restaurant outings to only a few times a month. We also scrutinized everything we put on our credit card, which we pay off in full every month to avoid finance charges. All told, we hope to save thousands just on discretionary expenses.

The basic question you have to ask in this exercise is, “What adds value to your life, and what can you live without?” There are usually some items that can be easily cut.

Save on Big-Ticket Purchases
When buying the most expensive products–vehicles, appliances, furniture, homes–it’s not only important to know how to buy them cheaply, but when as well.
When we had to replace a car this summer, we shopped intensively for the best price on the car we wanted and got a great deal because it was the end of a model year. We used online search engines, which are terrific these days. They can find you individual cars sitting on lots across the country and tell you how much dealers will discount them. The best prices are easy to track because discounts and rebates can change every week; it’s simple to monitor with a good online service.

For home-shoppers, you can find the most-motivated sellers during the dead of winter or around the holidays. September and October are the best times to buy major appliances, while February is a good time for furniture clearances. The bottom line for retailers is that they offer the lowest prices when they have to make room for new merchandise.

To be a successful saver requires not only discipline but an eye for detail. While it’s tough to monitor hundreds of purchases, if you can track them easily though software or online sites, it will make your life easier. You can go with simple online tools like Mint.com or NerdWallet.com or get into more-sophisticated products that combine tax accounting from Intuit. Whatever route you choose, your time will be well spent because you can not only find ways to spend less but save more–on a regular basis.

John F. Wasik is a freelance columnist for Morningstar.com and author of 14 books, including Keynes’s Way to Wealth: Timeless Investment Lessons from the Great Economist. The views expressed in this article do not necessarily reflect the views of Morningstar.com.