Sticking to a financial plan is like committing to a regular workout regimen: Everyone seems to have the best intentions, but before long, real life gets in the way of discipline and plans can go out the window.
There are ways though, for even the least frugal of us to start building a nest egg. Making small changes part of your everyday routine can grow that stash and help you protect your future.
One of the most important realities to face is that there is no better time than right now to make your financial security a priority. Take a look at the infographic below to see how putting your money to work for you sooner rather than later can pay off. Then use our handy calculator to see how different amounts, periods of time and rates of return can affect your long-term balance sheet.
Need some help to get started? Try the following tips to help you:
- Identify your financial goals.
- Craft a blueprint for achieving them.
- Understand some readily-available tools to help you stick to the plan you've created.
Use our calculator to estimate your savings
1. Track expenses and budget accordingly. Ask yourself: What are you spending on certain items and why? A simple search for “budget apps” or “money management apps” will bring up any number of free services that you can use to get immediate feedback on your budget and expenses – in real time right on your smartphone. These apps are designed to identify shortcomings and help you cut back on a gradual basis. They’re also with you at all times, and much more productive than checking Facebook every few minutes.
Analyzing your expenses can be a jarring experience at first, but each time you do it, the more honest you will be with yourself and the more comfortable you will grow in devising your strategy.
2. Set specific goals. Ask yourself: What are you planning for? A sound strategy requires deadlines and objectives, so knowing what you're planning for is as important as the planning itself. Aim to accrue a certain amount by a given date. It’ll give you something to shoot for, and even if you don't meet the mark, that's okay! The most important thing is making a plan in the first place – it’s much easier to feel good about your accomplishments if you know what it is that you want to achieve.
It's also worth considering two sets of reserves - one for emergency expenses, such as car repairs or unexpected medical costs, and one for long-term goals, such as retirement.
3. Pay yourself first. Ask yourself: Would you miss some money if you never saw it? Most financial advisors insist on paying yourself first. That means automatically depositing a portion of your paycheck directly into the vehicle of your choice before any bills are paid. The idea is that if you don't see the money you'll be less likely to miss it (or spend it). Before you know it, you’ll have established a considerable reserve fund.
It's not as much about the percentage you're setting aside as it is establishing realistic terms for your budget. If you can't afford to set aside 10 or even 5 percent each month, that's fine, as long as you're setting something aside. If you begin earning more, you can reassess your strategy and adjust the figures accordingly.
Understanding the importance of saving early. See this infographic.
4. Tools of the Trade. Ask yourself: What are some options that will not only protect my money, but help it grow?Short term tools:
- A checking account should be used to manage your incoming and outgoing money and pay bills. Many banks and credit unions offer free checking accounts with direct deposit from your employer or with a minimum balance. Checking accounts may protect your money better than holding onto cash, but they generally don’t encourage your money to work for you. For that, you may need other options.
- Interest-bearing savings accounts allow easy access to your money but are not as transaction-friendly as a checking account. Savings accounts are a simple way to set money aside for holiday expenses and vacations, but also leave your money vulnerable to an impulse buy. Savings accounts usually have lower returns than other vehicles that limit your ability to withdraw funds.
- For a short-term investment that may have better returns than a savings account, you could try a Certificate of Deposit (CD). The amount you put in the CD receives a fixed interest rate and generally has a maturity date after one month to five years. You cannot withdraw money from it ahead of time without incurring a penalty.
- A money market account may offer a higher interest rate than a savings account by requiring a higher minimum balance, and by limiting the number of withdrawals.
Long term tools:
For longer-term planning, consider qualified retirement plans that allow you to defer a portion of your salary into the plan and reduce your present income-tax liability by reducing taxable income.
- The most common retirement account is the 401(k), which is usually provided through an employer, but you can also establish an independent 401(k) if you are self-employed. A portion of your paycheck is deferred to the account until you reach retirement age, and employers also frequently contribute to help the account grow.
- There is also an Individual Retirement Account (IRA), and you can choose between a traditional IRA and a Roth IRA. Distributions from the Roth IRA are tax-free, while those from the traditional are not. Keep in mind that a variety of factors, including your age and tax bracket, may restrict your ability to choose one over the other.
- You also have the option of purchasing an annuity. Generally, you place your funds into it earlier in life for a source of income at a later date, usually during retirement. The key points regarding annuities are that they provide income tax-deferred growth, meaning their value grows pre-tax, but you do have to pay income tax on distributions from them. Perhaps most importantly, you cannot outlive your income from an annuity.
Life insurance is another interesting option to help achieve financial goals. While this tool’s primary function is to provide life insurance coverage to help protect your family’s assets in the event of your passing, a permanent life insurance policy can also be used as part of your financial strategy. Life insurance may allow you to tap into the policy’s cash value income tax-free for any number of long-term expenses - college tuition, retirement plans or down payments on a home - without the same restrictions applied to many of the alternatives.
Need help figuring all this stuff out? Call me at 858-487-9200. We're here to guide you.