Do you sometimes wonder how you are going to make ends meet when the time comes to retire? Have you given up hope of ever retiring? Do you worry whether there will any money available for you upon your retirement from social security, medicare and/or medicaid?
These are very important questions. Unfortunately, there are many people who don't even get to the point of asking these questions until they are on the verge of retiring. Studies show that 61% of all workers haven't even tried to calculate how much savings they will need in order to live comfortably in retirement. The key to financial health is retirement planning. The earlier you begin to plan and take action, the better off you will be and the less you have to set aside to insure healthy finances in retirement.
Let me try to give you some tips. The first step to develop a solid financial plan is to set aside enough money into a savings account to cover 3-6 months' worth of income in case of unexpected emergencies. This "emergency" fund will ensure that you have money to cover unexpected expenses while still allowing you to continue to build your financial future. Once you calculate how much you need to set aside (remember, 3-6 months' worth of take-home income), you should establish a goal for saving toward this emergency fund. Pay your "emergency" fund faithfully just like a utility bill or rent until you have reached your goal. This does not mean you need to save $300-400 per month, but save something every month, even if it is $25 or $50 per month.
The following are some other tips which should help you reach your retirement goals as well as develop healthy spending and saving habits.
1) Utilize any retirement savings plans offered by your employer (even if the employer won't match your contributions). These contributions are "pre-tax." This means that putting away $50 out of your paycheck does not mean your net pay will be $50 less. In fact, it might only be $35-40 less. If your employer does not any type of retirement savings plans (like 401(k), 403(b), or 457 plans), you should still put money away into an IRA. Consider signing up for automatic transfers from your paycheck into an IRA.
As your income increases over time, you should increase the amount or percentage of your income you are putting into your IRA or retirement plans. If you adopt this plan your savings and income have the potential to grow together over the years and outpace inflation.
2) Set spending limits and stick to your limits. It is far too easy to "charge" it when you don't have the money in your pocket to afford a particular purchase. You have to resist that temptation! Take time to calculate a reasonable "spending allowance" for a week. At the beginning of the week, withdraw your "allowance" and limit your spending to your allowance. This will help you set priorities and budget your money.
3) Flexible spending accounts (FSAs). Many employers offer flexible spending accounts into which you can deposit pre-tax earnings for medical and dependent-care expenses. These funds can help parents save tax dollars when paying for childcare or medical expenses. Again, like in the 401(k) scenario, you can put $50 into the account and it doesn't cost you $50 off your paycheck. The only potential pitfall is that you must spend the money by the end of the year or you lose it. You have to keep receipts to show you spent the money on the required childcare or medical expense to get the money. Therefore, make sure you are only saving what you know you spend.
4) Bill yourself. Whenever you pay off a major expense, like a credit card or a car, consider continuing those payments by making deposits into your own savings account. Eliminating your debt increases your net worth and by continuing to build your savings you can increase your assets and eliminate your reliance on credit. For example, if you are paying $400 per month for a car on top of your living expenses. Once your car is paid off, instead of spending the $400, put it into a bank account. This way you can begin saving for your next car and can have a bigger down payment and better financing terms.
5) Utilize piggy banks for all that loose change. Over the course of a year, loose change can add up! Pay your expenses with dollar bills and deposit all your change at the end of the day into a piggy bank. If you are able, consider depositing any $1 or $5 bills you have at the end of the day. If this is done faithfully throughout the year, you will likely have more than a thousand dollars in your piggy bank at the end of the year!
6) Allocate lump sum cash payments into three parts. When you receive your tax refund, inheritance, or bonuses, break up these things into three parts. Set aside 1/3 of the money for long-term savings goals (retirement), set aside another 1/3 for short-term savings goals (your next car purchase, furniture purchase, etc..) and the last 1/3 you can use to reward yourself! This way you can still splurge, but you can also have the satisfaction of continuing to meet your savings goals.
7) Have fun! Make a list of fun and inexpensive things you like to do. When you feel the urge to spend money, do the fun and inexpensive things you've put on your list instead. Go to a museum, take a drive through the countryside, go for a hike, go to the zoo, etc... Think about your list and stick to it whenever you feel like going on a shopping spree for useless items. If you can successfully eliminate spending money on unnecessary items, you will be much closer to attaining your savings goals.
I know what you're thinking. All of this is nice, but I can't afford it. Consider this. The results of the Retirement Confidence Survey indicates that those people who thought about their retirement and made a plan changed their financial habits. Saving a mere $20 per week will amount to $1,040 by the end of the year and with only a 5% annual return will result to well over $50,000 over 25 years!
Saving doesn't have to be difficult, but it does require you to think about these issues, make a plan, and follow-through on the plan. With a little bit of time and effort, your goals will become a reality.
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