The first step toward monetary stability is goal setting, both in the short and long terms. You are more prone to overspend if you don’t have a goal in mind. You’ll be in a bind if and when you need emergency funds or savings for retirement.
Credit card debt can keep you from saving enough money to afford adequate insurance, leaving you unprotected against some of life’s most significant dangers. As the globe discovered during the epidemic and as many families learn every month, even the most cautious individual can’t prepare for every calamity.
When you give yourself time to consider potential outcomes, you may better organize yourself to deal with them. This should be a continual activity so that you may mold your life and objectives to suit the shifting circumstances that will surely arise.
If you do some formal financial planning every year, you may check in on your progress toward your goals and make any necessary adjustments. Take this time to create financial objectives, if you haven’t done so before, so that you can establish or maintain stable financial footing.
In order to learn to live within your means, lessen your financial worries, and save for retirement, the following goals, ranging from immediate to far-off, are recommended by financial experts.
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Short-Term Financial Goals
Establishing and working toward intermediate financial objectives prepares you to tackle longer-term, more ambitious targets. In as little as a year, you can easily accomplish these preliminary steps: Establish and adhere to a financial plan. Create a rainy-day fund. Reduce the burdensome balances on your credit cards.
Establish a Budget
You can’t plan your future without first understanding the present. That involves creating a budget, advises Lauren Zangardi Haynes, a fee-only financial planner with Spark Financial Advisors in Richmond and Williamsburg, Virginia. “You might be surprised at how much cash is lost every month.”
Using a free budgeting application like Mint makes keeping track of your spending simple. Expenses from all your accounts can be consolidated into a single location and tagged accordingly.
You may also make a budget the old-fashioned approach by reading through your recent bills and bank statements and assigning appropriate categories to each one using a spreadsheet or a piece of paper.
You can direct your future financial resources more wisely when you have a clear picture of your current spending habits. Is it worthwhile to spend more money each month to have fun and save time by eating at restaurants? Good, as long as you have the money for it.
If not, you’ve stumbled upon a simple method to reduce your monthly spending. You can either find ways to save money while dining out, eat more meals at home, or do a mix of the two.
Create an Emergency Fund
You should always have some cash saved away in case of an emergency. The initial investment should be between $500 and $1,000. When you get there, you can increase your emergency fund to prepare for more severe financial setbacks like losing your job.
After the COVID-19 pandemic, you may have wished you had set aside some money in an emergency fund. Even if you did have one, you might have depleted it and now need to restock.
Certified financial planner Ilene Davis of Financial Independence Services in Cocoa, Florida, advises clients to set aside at least three months’ worth of expenses to cover their basic needs and financial obligations, and preferably six months’ worth, especially if they are married and work for the same company as their spouse, or if they live in an area with limited job opportunities.
She recommends looking for anywhere to make cuts in the budget, even if it’s just a little bit. Kevin Gallegos, vice president of sales and Phoenix operations at Freedom Financial Network, an online financial services company that helps people with things like debt settlement, mortgage buying, and personal loans, believes that another approach to build emergency money is by decluttering and organizing.
To supplement your income, consider selling unused stuff online (through sites like eBay or Craigslist) or in person (via a yard sale). Think about converting your pastime into a side gig so you can put more money away for the future.
To save up for an emergency, Zangardi Haynes suggests opening a savings account and linking it to an automated transfer of the monthly amount you can afford to put away (based on your budget). If you are paid biweekly, you will receive a “extra” salary twice a year, so put that money aside as soon as it arrives in your bank account. She warns that delaying the transfer until the end of the month increases the likelihood that the money would be spent rather than preserved.
Even though you should be saving for other things, like retirement, as well, an emergency fund should come first. The savings account is the foundation upon which you can build the financial security necessary to realize your other ambitions.
Pay Off Credit Cards
It’s been debated for years whether it’s better to set up an emergency fund or pay off credit card debt first. An unexpected expense might quickly put you further behind on your credit card payments if you don’t have a savings cushion to fall back on.
However, there are many who argue that credit card debt should be paid off first because interest charges are so high that they make it difficult to save for anything else. Choose the approach that makes the most sense to you, or combine them.
Davis suggests prioritizing bills with the highest interest rates first, making only the minimum payment on all other debts, and eventually paying them off. If you have any spare cash, use it toward paying off the card with the highest interest rate first.
The term “debt avalanche” describes the strategy Davis outlines. The debt snowball is another approach worth thinking about. The snowball approach involves eliminating debts from smallest to largest, regardless of interest rate. After you’ve paid off your smallest loan, you can move on to the next lowest, and so on, until you’ve paid off all of your debt.
If you have $10,000 or more in unsecured debt (like credit card debt) and can’t make the minimum payments, you may want to consider debt negotiation or settlement, as suggested by Gallegos.
Companies providing this service are governed by the Federal Trade Commission, and in exchange for a fee (typically a percentage of the total debt or a percentage of the amount of debt reduction), they negotiate with creditors on the consumer’s behalf to reduce their debt by as much as half.
Gallegos claims this method can help consumers completely eliminate their debt in two to four years. Debt settlement has negatives including lowering your credit score and leaving you vulnerable to legal action from your creditors.
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Midterm Financial Goals
After you’ve completed or made significant progress toward your short-term financial goals (such as creating a budget, starting an emergency fund, and paying off credit card debt), it’s time to shift your focus to your mid-term financial objectives. These targets will serve as a connecting point between your immediate and long-term monetary objectives.
Get Life Insurance and Disability Income Insurance
Do you have a family that counts on you financially? If so, your loved ones will need life insurance in the event of your untimely demise. Term life insurance is the simplest and most cost-effective form of life insurance, and it is sufficient for most people.
Find the most affordable insurance coverage with the aid of a broker. Medical underwriting is standard for most types of term life insurance, and unless you have a terminal illness, you should be able to find at least one insurer willing to insure you.
Gallegos recommends getting disability insurance to safeguard your income in the event of an unexpected illness or injury. “Most employers provide this coverage,” he notes. “If they don’t, people can get it on their own until they’re eligible for retirement.”
If you get seriously ill or wounded and are unable to work, disability insurance can help restore some of your lost income. It can provide a greater benefit than Social Security disability income, making it possible for you and your family to have a higher standard of living in the event that you become disabled and unable to work.
Having an emergency fund is crucial since there will be a lag time between losing your ability to work and receiving insurance benefits.
Pay Off Student Loans
Many people’s monthly finances are severely impacted by student loan payments. If you can reduce or eliminate those payments, you’ll have more money to put toward retirement and other goals. Refinancing into a new loan with a lower interest rate is one method to help you pay off your student debt faster.
Be wary, though; refinancing federal student loans with a private lender could mean giving up access to helpful federal student loan advantages including income-based repayment, deferment, and forbearance.
Consider Your Dreams
The purchase of a primary residence or, later, a second or vacation property can be examples of worthy mid-term targets. Perhaps you’re a homeowner who’s ready to start saving for a larger home or a major makeover. Mid-term objectives can also include saving for things like college or starting a family.
The next step is to calculate how much money you’ll need to save each month to make a dent in your goal(s). Creating a mental picture of your ideal future is the first step toward making it a reality.
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Long-Term Financial Goals
Most people’s primary long-term financial objective is amassing sufficient assets to fund their retirement. The general consensus is that you should put away 10% to 15% of your income into a tax-advantaged retirement plan such as a 401(k), 403(b), regular IRA, or Roth IRA every time you get paid. However, you should calculate how much money you’ll need to retire in order to be sure you’re saving enough.
Estimate Your Retirement Needs
To get a rough idea of whether or not you’re prepared for retirement, you may make a simple back-of-the-envelope calculation, as shown by Oscar Vives Ortiz, a CPA financial planner with PNC Wealth Management in the Tampa Bay/St. Petersburg, Florida area:
- Think about how much money you’ll need each year to retire comfortably. You may estimate how much money you’ll need by looking at the budget you made when you first started working toward your short-term financial goals. In retirement, your healthcare bills may increase, so you should budget accordingly.
- Deduct the money you’ll be making. Think about things like pensions, retirement plans, and Social Security. This is the remaining sum that must come from your investment portfolio.
- Think about when you’d like to retire and how much money you’ll need to support yourself then. Consider your present assets and annual savings rate. Your retirement planning math needs can be handled by an internet calculator. You are on schedule to retire if the sum equal to four percent or less of this balance at the time of retirement will meet the amount of expenses that your combined Social Security and pensions will not cover.
For instance, if you retired with $1,000,000 and withdrew $40,000 in the first year (4% of $1,000,000), then added 2% to your withdrawal the following year ($40,000 plus 2% in year two, or $40,800; $40,800 plus 2% in year three, or $41,616), you would have enough money to last for 30 years. Vives Ortiz explains why people frequently use a 4% savings rate when planning for retirement.
Increase Retirement Savings
According to CFP Vincent Oldre, president of Assured Retirement Group in Minneapolis, for most people who have an employer-sponsored retirement plan, the employer will match a percentage of what you are paid. You could get a 3% or 7% wage matching from your employer.
The most crucial action you can do to secure your retirement is to contribute enough to receive the full company match. “It really bothers me that so many individuals don’t save for retirement, claiming they either ‘can’t afford to’ or ‘afraid of the stock market.’ They lose out on what I term a ‘no-brainer’ return,” adds Oldre.
Michael Cirelli, a financial advisor with SAI Financial in Warrenville, Illinois, suggests starting your IRA contributions in January instead of December to give your money more time to grow and provide you with a more substantial nest egg in your golden years.
The Summing Up
It’s more vital to be consistent than to achieve flawless, linear progress toward any goal. Don’t feel guilty about using some of the money in your emergency fund if you have to pay for an unforeseen expense like a car repair or medical bill instead of putting money into the fund that month. Whenever you can, just get back on track.
It’s the same if you get sick or lose your work. You’ll need a new strategy to get through that bad patch, and you might not be able to make progress on paying off debt or saving for retirement at the same rate you were before.
The beauty of annual financial planning is that it gives you the opportunity to evaluate and revise your goals and track your progress toward achieving them despite the inevitable ups and downs of life. The cumulative effect of your actions, both large and small, over the course of a year and a lifetime will add up to the realization of your financial goals.
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