By Kevin Driscoll | June 2, 2020
While you may be looking for ways to have more money in your budget, it might be tempting to stop contributing to your retirement account. But, especially if you’re still receiving a paycheck, there are good reasons to continue contributing.
Before you make any fast decisions, take a realistic look at your budget. Are there places to cut back, even temporarily, other than your retirement plan? For example, could you temporarily cancel subscriptions or services?
If, however, making your full contribution means you just can’t cover your expenses, consider reducing the amount or skip a few before you decide to stop altogether. There are solid benefits to sticking to a plan.
You’ll have an opportunity to get more for your money. Believe it or not, a recession can be a unique opportunity. Since you can buy shares at lower prices, you’ll be able to buy more shares than you would normally. Once the market bounces back, not only will the shares in your account increase in value, but you’ll have more shares and, thus, have the potential for greater earnings.
The principle of dollar cost averaging starts with you contributing a set amount at regular intervals. By spreading out your payments, you can take advantage of market corrections and discounted pricing without having to try to figure out the optimal time. Or, in other words, your fund will adjust to the rhythm of the market, buying more shares when prices drop and fewer as they rise.
Here’s a very simplified example.
- Suppose $25 comes out of your paycheck for retirement every week. Let’s say you bought a particular stock at $10 a share, which means you could purchase 10 shares the first month.
- In month 2, the market declines and your 10 shares are now worth $5 each. With this month’s contribution, however, you’d be able to purchase 20 shares instead of only 10, so now you own 30.
- If the market were to rebound in month 3 and your shares are back to being worth $10 a share, you’d buy this month’s 10 shares, and you’d now own 40 shares instead of 30.
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This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.