As I sit to write this piece it seems like these things have been said before. So, why write it? The answer is that we all need to be reminded. It is so easy to let our financial life coast on autopilot. Suddenly ten years have gone by and you’re still struggling to save, pay off credit card debt or make real progress toward retirement. Look at these five and ask yourself, what have I been neglecting and what can I do to improve my situation?
1. Live within your means. Sounds simple but in practice it can be a challenge. What does this look like? By spending less than we earn there is money set aside for emergencies and available to save for retirement. It means never (hopefully ever) carrying a balance on your credit card. All this implies that you know where your money goes. By tracking your spending and having saving as a top priority you will be able to make the tough choices when they arise.
2. Save early and often. Before your brain can raise the objection that you’ve messed up already remember this: time is your best ally. So you didn’t start 3, 5 or 10 years ago, start today. The longer your money has time to grow and work for you; the better off you’ll be in retirement. For example, you deposit $5,000 today for 20 years (when you’ll retire.) If you wait five years to save that amount, you give up many years of earning power on that money. At 6% return in 15 years the late-saver scenario will have 25% less money than the 20-year scenario. This shows the joys of compound interest and the power of starting sooner rather than later!
3. Protect your financial situation from major setbacks. The two biggest potential risks are healthcare costs and job loss. Having health insurance is huge and now with Obamacare shouldn’t be as big a risk. Job loss is tougher and suggests the need for a large emergency fund. The more you earn the larger the fund. Six to twelve months’ expenses are a good starting point. Hopefully you and your significant other don’t work at the same business or even in the same industry. If so, increase the funds saved for this purpose.
4. Increase your earning capacity. This can mean investing in yourself or in your business with an eye on creating more income and potential savings. This works on the same compounding principle as interest. Earn more sooner, save more sooner and the money has more time to benefit from compound growth. If you get a raise increase your savings rate so that just a portion of the additional money is spent.
5. Don’t be seduced by high returns when investing. It is easy to be tempted by the prospect of big returns. People need to remember that more risk means wider swings in the value of your investment portfolio. It also increases the probability that you don’t reach your savings goals. Sure you could end up with an investment worth $1 million. But you could also end up with $250,000. Is that sufficient for your retirement needs? People are often happiest and more confident when they make steady progress toward financial goals. Taking appropriate risks and diversifying correctly will serve you best in the long run.
You probably weren’t surprised by any of these. If I helped you remember the reasons or the benefits of following these truths to retirement wealth then my work is done. Now it’s up to you. Pick something and implement it this weekend!