Zero in Savings? A New Year Means New Opportunities to Increase Your Savings - The 52 Week Money Challenge

Written by Lyn Brooks, Staff Writer

Zero in savings? We started 2016 with $0 in savings. Sadly, my family and I are not alone. According to a late 2015 survey by GoBankingRates, 28% of Americans have zero in savings, and 62% have less than $1,000 saved. What are any of us thinking? Who do we expect to help save us should a financial emergency occur? Santa Claus?

Whenever I think about the current state of my family's finances and our lack of savings, which is almost constantly, I start to feel a bit down, but then I remind myself that a new year means new opportunities!

How We Ended Up with Zero in Savings

The last few years have been extremely difficult, financially. I've survived several critical, and expensive to treat, illnesses. I then lost my job in the Great Recession.

When I couldn't find a new job in my area, I turned to freelance writing to try to make ends meet. For those of you that aren't freelancers, writing is truly a feast to famine proposition, but in my area there really isn't any other opportunities to increase my income.

My local economy is still depressed, with new layoffs being announced each week, so it continues to look unlikely that I will find a new job any time soon that will bring in more than what I manage to rake and scrape together freelancing.

In addition to my unstable income issues, last year my husband needed to resign his position of nine years and was then unemployed for another six months.

During this time, our home and garage suffered extensive damage during a winter storm that saw over three feet of snow fall in our area in less than 24 hours. Then the temperatures slipped to 24 degrees below zero Fahrenheit, taking out all of our plumbing. We lost a good portion of our personal belongings. We are still having issues getting the insurance settlement released so that we can finish repairing and rebuilding everything that we lost.

A few months later, my mother, who has been staying with us after surviving a stroke, accidentally caught a pan on my stove on fire. It took out the stove, the two walls around the stove and the exhaust and two cabinets above, as well as smokey soot on the ceilings and surfaces throughout my home. So, now we are without a stove to cook on, in addition to the other issues.

We've  ended up spending our entire life's savings in order to survive through all of these trials. It was the only way to avoid filing bankruptcy. It's still difficult to make ends meet, but slowly we are clawing our way back.

I am 47, my husband is 54, and, we have no savings!

Steps We Are Taking to Begin Rebuilding Savings

This is a new year, hopefully it will be a better one for us, and millions of others, financially. As this new year is starting, I know this is the year that we must at least begin to think about rebuilding our savings. We are both getting older, and not in the best of health, so, realistically, there really isn't a lot of time left to rebuild our retirement nest egg.

401(k) Savings

Our main issue at the moment is that we realistically don't have a lot of expendable income to divert to savings. My husband just became eligible to contribute to his new employer's 401(k) and so he is contributing 10% at the moment.

It's the start of the new year, and my income from writing really doesn't start picking up until later in the spring. I suppose I could wait to being saving, but I really feel that it's important to start now, while I have this "new year, new opportunity" mindset and momentum  going for me.

Saving Tax Refund

Of course, we already plan to save the bulk of our tax refund that we will receive later in the spring, and that should be a little over a thousand dollars. I really want to do something in addition to this and my husband's 401(k) contribution though, something that will get us back in the habit of setting aside money for our savings on a regular basis.

Start Small and Build - The 52 Week Money Saving Challenge

That's why we've decided to do the 52 Week Money Saving Challenge. It's a really simple strategy to help folks get back in the weekly habit of saving money. I like it because it starts with a small amount, just $1 the first week, and lets you slowly increase the amount you are saving each week, so that it feels less painful to your budget. It also works out well with the cash flow cycle that is generated by my freelance writing income.

Getting started is really simple. Set aside $1 at the end of the first week, $2 for the second week of the year, $3 for the third, and then continuing on and adding just one additional dollar that you set aside for each week of the year. At the end, you should have $1,378 saved.

I know that in the grand scheme of things, $1,378 is not really a lot of money. Certainly not enough to retire on in a few years. But, it does help us to begin rebuilding our savings.

As the year continues, I plan on looking for more ways for us to increase our savings. To reach our goals, we will need to cut back on spending, as well as looking for ways to grow our income. I plan on sharing my journey with you. I hope that sharing my successes and failures, will help others, and, I hope that you, dear reader, will help me by sharing your tips and words of encouragement in the comments section!

Getting Started Saving Money

2016 began on a Friday, and so, I began my week 1 on the first day of the year. This year will also end on a Saturday, so my week 52 will end on Friday, December 30th, instead of the 31st. Week 5 just recently passed, and so, I have $15 in my savings at this point. ($1+$2+$3+$4+$5) This coming Friday, February 5th, will be the start of Week 6 and so I will deposit $6 to our savings account on this date.

Again, I know this isn't a lot, but it's a start! It's also still not too late to join me! Just deposit/transfer $15 into your savings account, or, if you don't have a savings account yet, put it in a jar or other container to save up and deposit later. Then, as each week passes, increase the amount that you add to your savings by just one dollar more. At the end of the year you will be $1,378 closer to reaching your grand savings goal.

We are saving to build an emergency fund, and then, add to our retirement savings. How do you plan to use your savings?

Photo Credit: Flickr, Images_of_Money

Cashing Out My 401(k) Early Was a Costly Mistake

It's tempting to cash out your 401(k) if you are facing unexpected bills or a layoff. Losing out on interest and other growth opportunities, however, isn't the only consequence of withdrawing part or all of your balance from your 401(k) plan, as this contributor discovered. Continue reading to learn about why cashing out a 401(k) account is a costly mistake. 

By Lyn Brooks, Writer

Most of us who have 401(k) plans are told upfront by our plan providers to avoid taking early distributions from our 401(k)s if at all possible.

When I lost my job in 2011, and had unexpected medical needs and fell behind on my house payment and other financial obligations, it seemed like the only option that I had to prevent foreclosure was cashing out my 401(k). Since I wasn't returning to work, I assumed that the value of my 401(k), combined with my unemployment benefits, would be less than my earned income from prior years, so I did not plan for any potential tax consequences. This was a mistake.

Most people are knowledgeable enough about 401(k)s to realize that every dollar that you take out of your plan is a dollar that has lost time that it could have been invested, compounding and growing. What you may not realize is that if you take an early distribution from your 401(k) there is a "special" federal penalty tax of 10% on early distributions.

While the investment firm I used held out 10% of the value of my 401(k) for federal income tax purposes, this does not begin to cover the federal tax penalty for the early withdrawal. Also, to make matters worse, if you have taken a loan on your 401(k), and you do not pay it back before leaving your employer, the amount left due on the loan is also counted as a taxable early distribution and is also subject to the 10% penalty.

Each year I have always managed to earn a refund on my federal tax return, but in 2012 I had to come up with a little over $2,500 by April 17th to avoid the additional penalties and interest on my federal tax bill. While my total earned income from the 401(k) distribution and unemployment benefits was less than I usually make each year, the 10% penalty is an unexpectedly significant amount. The entire amount due on my tax bill for 2012 was the 10% penalty for the early distribution from my 401(k).

I cannot stress enough that if you have a 401(k) and you are short of cash that you should try every way possible to avoid taking an early distribution from your plan. If you are like me, and you find yourself without a job and you have no other way, then my suggestion is to run the numbers at the time of your distribution and plan for the 10% penalty that will be due at tax time so you can go ahead and set it aside.

Luckily, my state does not also impose a penalty tax for early 401(k) distributions, but not all Americans are so lucky. My suggestion would be to check with your state to discover if there is also a state penalty tax for the early distribution and plan for that as well.

Since I was unaware of this penalty, I only found out what was due when I completed our taxes, which left less than two months to come up with the $2,500 that was due. A little planning on my part at the time of the early 401(k) distribution in 2011 would have made this a little less financially painful and certainly less stressful.

At the time that I took the distribution, I assumed that I would eventually find another job and easily be able to rebuild my retirement savings. I was very wrong. Three years later, I am now self-employed as a small business owner and struggling, with even less means to begin to rebuild my retirement savings. Cashing out my 401(k) early was not only a costly mistake, it was, perhaps the worst financial mistake of my life. By sharing my story it is my hope that others will learn from my mistake.

Photo Credit: 401(K)2013 and 401K Calculator