Now that all the presents are unwrapped, half of the new toys already broken and that carton of egg nog is finally empty. You might be left nursing a hangover from that epic New Year’s Eve party you went to as you contemplate the very meaning of your existence. At some point, you might have given thought to what the New Year is going to hold for you. In the aftermath of the holidays, most of us are left with a renewed sense of family or a reminder of why we never talk to some people. For a lot of us, the beginning of the year is a chance to get off to a good start. Whether it’s implementing that workout regimen that you’ve been off and on with the last few years, or figuring out how you can squeeze in more time to volunteer at your favorite charity.
The New Year is also a great time to revisit your financial goals and kick start any plans that you have been putting on hold. Since we often have multiple financial goals competing for limited dollars, the first thing to do is prioritize our goals. For most people those goals are going to include saving for retirement, paying down debt, buying a home, and if you have young children, saving for college and making sure that they are OK if anything happens to you.
In this case, those goals were listed in a particular order. I believe that saving for retirement should be everyone’s primary financial objective. Not in the sense that it should command most of your money or is the thing that you think about the most, but in the sense that it should be the first thing that you get started on. When saving for retirement, time is your best friend. All other goals you can start at any time, but if you wait too long to start saving for retirement, you could miss the boat, and be left in a dingy.
Saving for retirement is not one huge isolated transaction that you must prepare for, but a gradual process that is done with consistent minimal effort over time. However, young workers don’t see the need to start planning because they view retirement as something so far off that they will get to it eventually, or that some other entity will take care of it for them. The reality is that younger people can benefit the most from starting early because the phenomenon of compounding interest will have much more time to work its magic.
Paying down debt and buying home are important as well, but not as time sensitive as saving for retirement. Delays in not doing those things are not as magnified as delays in saving for retirement. That said, paying down debt and buying a home go hand in hand. Usually, reducing debt improves the chances of getting a loan as well as the loan terms, particularly the interest rate.
If you have young children, then you need to make sure that they are taken care of if something happens to you. That means having an adequate amount of life insurance and an estate plan. Then if, and only if, you have enough surplus dollars after accounting for your other goals, you can start to consider saving for their college education. I stress doing this only after you have properly funded your other goals, because I have seen too many instances where clients provide for their children at the expense of their own financial security. We all want to provide for our kids and give them opportunities that we didn’t, but if you over do it, they will in effect be your retirement plan. Like most things in life, balance is key.
So, if you are looking to get the financial part of your life in order I suggest the following steps to get started:
1. Save for retirement. This is a must, must, must. If you are working full time, you HAVE to save your money. If you are not doing it now, force yourself to do it today. If you are already participating in a workplace retirement plan, make sure you are saving enough. Consider increasing your contribution. Everyone’s goal should be to save at least 10 percent of your annual income every year. And if you really want to be successful try 15 or 20 percent. Even if you are “struggling” living pay-check to pay-check, if you have a job you should save at least 5 percent. Zero percent is not an option. Pay yourself first. If you are self-employed or your employer doesn’t offer a plan, then you need to be even more disciplined and establish an IRA or similar type of account on your own. Or ask a financial professional to help you out.
2. Pay Down Your Debt. The first step to paying down debt is to not accrue more. Get rid of or at least stop using those credit cards and only spend the money you have. What I suggest is that you start with the smallest balance credit card and make bigger payments on that card and make the minimum payments on other cards. As you pay off the smaller cards take those payments and move them up with the payments on the next biggest balance. Eventually you will get to focus on the few big balances. Economically it does make more sense to pay down the higher rate cards first, but emotionally it is very empowering to knock out those smaller balances so that you can focus on the bigger ones. It creates a sense of debt reduction momentum.
3. Budget. This is the hardest one for most people. Trying to get their arms around how much they spend and what they spend it on. Tracking your expenses will help you understand where your money is going and how it is used. Budgets also help you avoid spending unnecessarily. If you don’t have the time or discipline to do this, then I recommend that you make sure you are putting enough money towards your other goals and simply adjust your spending accordingly. That means not using credit cards to cover your spending.
4. Build up your Liquid Savings. This can also be challenging for most people. Traditional financial planning says that you should have 3 to 6 months of living expenses in a liquid savings account for emergencies such as medical or loss of employment. In a perfect world this is true. Admittedly, this can be difficult to do. You should always have some savings, but while you’re working on the other steps, $1000 should be enough cushion to get you over most things that could come up. And, if you have a big emergency, then you can always take a loan from your retirement account or use a credit card, but only if you have no other options. However, you should try and get to the point that once you have paid down your debt, you are building up your liquid savings. This money could be used as a down payment for that house, or to start that college fund that you have been thinking about.
These are the “baby steps” to getting your financial house in order for 2017. If you need help, don’t be afraid to seek the help of a professional. Just make sure you understand their process and how they get paid. Be wary of advisors who lead with a product, or whose offerings are limited to insurance policies. Not that all insurance products are bad, but they do pay the highest commissions of any financial product out there and as a result are often over sold. Other than that, Good luck and HAPPY NEW YEAR!!!!
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