How to Fund Your 401(k) and Still Have Spending Money

A few lifestyle adjustments could help free up the extra cash.

 A young woman reaches for cash in a green wallet.
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Consistent funding of your employer's 401(k) plan is a great way to save for retirement while paying less in income taxes, but not everyone is aware of the benefits. If you are among those who feel you can't afford to contribute to a company-sponsored 401(k) plan, you are missing an opportunity to get additional money from your employer in the form of matching funds based on how much you contribute.

Financial planners and other money experts advise people who are working in a full-time job that offers a 401(k) plan to research its rules and cut back on other spending in order to contribute. "Take advantage of the company match," says David Bendix, president of Bendix Financial Group. "I call it free money."

The 2012 Survey of Income and Program Participation from the U.S. Census Bureau shows that 61 percent of all workers have access to a company-sponsored pension or retirement plan, up from 59 percent in 2009. Yet, less than half participate. Participation increased to 46 percent in 2012, up from 45 percent in 2009, but is less than in 2003, when 48 percent participated, according to the Employee Benefit Research Institute.

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How much you'll be able to contribute depends on your individual financial situation. Typically, Americans fall into three situations, according to David Jones, president of the Association of Independent Consumer Credit Counseling Agencies: Those who are "just barely making it," Jones says, those who have a little disposable income and those with a considerable amount of disposable income. Most people can identify with one of these groups, and your status doesn't necessarily have to do with how much money you make. It depends on your assets (how much you earn from various sources), and your liabilities (how much money you spend). Most people, Jones says, have a good picture of their assets but underestimate how much they spend. Even if they draw up a budget, he says, they tend to leave out items such as insurance costs and lunches they buy every day.

Employees can contribute up to $17,500 to a 401(k) plan in 2014. If you are 50 or older, the catch-up contribution limit is $5,500 for 2014. Each employer-sponsored plan has its own rules as to what percentage it matches, the amount of the match and how long you have to be with the company before you are vested and eligible to take the matching funds when you leave the employer.

Here are strategies for each scenario:

If you are living on the edge: If you are living from paycheck-to-paycheck, and believe you cannot contribute to a company 401(k) plan, it's time to "change your lifestyle," Jones says.

Look at the things you might be able to change, and free up enough money so you can pay into your 401(k) plan. "The closer you are to retirement, the more important it is to do that," he adds. Money that is automatically deducted from your paycheck and put into a 401(k) plan means you'll pay less in annual income taxes.

For example, if you earn a salary of $50,000, and you contribute $2,000 to a 401(k) plan, through "forced savings," you'll pay less taxes and have your money working for you in some type of investment. Most likely, if the amount is small enough at the beginning, you won't miss it. "Pretend you're making $48,000 instead of $50,000," Bendix says. The earlier you start this habit, the better. You get immediate tax savings now and the "compounding effect" from the dollars you put away, he says.

If you have credit card debt, student loan debt and other expenses, you'll have to pay these debts as well, so your 401(k) contributions will be limited at first. You might only be able to have 3 percent of your paycheck deducted this year, but you can increase the amount by another percent next year, says Mary Hunt, author of the book, "The Smart Woman's Guide to Planning for Retirement."

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If you have minimal disposable income: If you're feeling pinched when it comes to funding your 401(k) plan, assess where you stand by writing down all your assets and all your liabilities including items you pay for with your credit card, those you pay for with cash or a debit card and those that are automatically deducted from your checking account. In this way, you can determine areas in which you can spend less, and use that money to fund your 401(k) at a larger percentage. It's advisable to look at expenses as "essential" and "optional," Hunt says. A lifestyle that uses up all of your income or a large portion of your income means you will be unable to save for the future, she adds.