Everyone tells us we should save. Invest in your 401k. Don’t count on Social Security.
First things first.
Retirement savings is a huge important goal to have, but you also have to look at where you are currently at. Do you have a lot of debt right now? If so, how much are you paying in interest for credit cards? an 17% interest rate on a credit card versus starting to save for your retirement where you money will on average grow 8%, doesn’t make much sense. You are putting the carriage ahead of the horse. Pay down high interest debt first.
Do you have a safety net? Surprises happen, better to be ready for them. Typically you should save up an emergency fund of 3 to 6 months of expenses. Most Americans don’t have enough liquid cash to pay off an unexpected emergency of $500. Save a little and you’ll feel much calmer.
How much is enough?
Current Financial analysts say that by 30, you should have a year’s worth of your salary saved. By 35, you should have twice your annual salary. And by 40, three times. Then ultimately have 10x your annual salary by 67. There are various studies suggesting different amounts.
Spend less than you earn.
This all sounds great, but if you are having trouble paying all your bills or knowing you have enough money left at the end of the month. So before you run you need to know how to walk. Analysis your spending for the last 3 months. Track how much you made and how much you spent. You should start to see problem areas pop up. If you don’t adequately follow where your money is going you’ll never be able to steer it to be better spent and grown for you. Easy things to look at; do you need to buy a latte every day, bring a brown bag lunch, lower your cell phone plan, or cut out cable. If you cut out any or all of these things you could return $100 per month back to your pocket, that’s $1,200 at the end of the year.
Invest a portion of the remainder.
If you company offers a company match to your 401k, enroll to at least cover that, otherwise you are throwing away free money. Plus, by enrolling in your 401k the money taken out is pre-tax, which then lowers your taxable income. Your 401k plan will have multiple investments to choose from. When in doubt pick “index funds”. They typically charge the least fees, which allows more of your money to grow. Pick a fund plan that matches your personality. If you feel too much stocks is worrisome pick a percentage of bonds. Some people like target funds because it auto-shifts the allocation your are invested in based on age milestones. You keep contributing and the distributions are shifted without your having to worry.
Don’t touch the money.
Long term investments need to percolate, before you can enjoy them. Compound interest is your friend. Compound Interest is addition of interest to the principal sum of a loan or deposit or can be simply thought of interest on interest. Your investing the interest instead of paying it out, which then allows your money to grow quicker.
Don’t over think it.
Sometimes simple is better. If you feel comfortable with what you are doing, then don’t change it. Constantly check on your investments, whether once a year or once a month. Don’t assume that everything is okay because you set something up 10 years ago. Needs change as live changes. First and foremost start saving something today even if it small. Where you can automate it. If you don’t see the money you won’t be tempted to spend it. Make yearly goals and break them down by monthly check-ins. Setup calendar reminders to check accounts.
In short don’t delay today because it will definitely become a bigger problem tomorrow, and tomorrow’s tomorrow.
-Pay off high interest debt
-Save for an emergency (3-6 months)
-Invest for Retirement
Now, this is what I consider the basics. We’ll talk another time about maximizing your potential savings and earnings.