By Judy Loy, ChFC®, RICP®
Everyone has financial concerns. For many Millennials, it is paying the bills, student loans and enjoying life. For Gen X, we are paying mortgages, saving for retirement and starting to reach our peak earning years. Baby Boomers are facing retirement, caring for grandchildren or parents and hitting their highest net worth years. The Silent Generation, those born in the mid-1920s to the early 40's, are most concerned with passing on their legacies, not outliving their retirement nest eggs, and paying for long term care. Throughout life, we face financial concerns and there are some ongoing basics to keep in mind.
Start by setting financial goals. Just as individuals and families have different values, they will have different financial goals. Typical large financial goals that people save towards are college for their children, home ownership or retirement. Prioritizing is important when determining where to put your savings among your goals. Of course, priorities will change depending where you are in life. That's why it's good to review priorities, goals and attainment of goals on a regular basis. Two tips to help: first, you can borrow for college but you can't borrow for retirement. Second, buying a large home may be tempting, but the monthly mortgage payment may restrict you from saving for other goals or from enjoying vacations or everyday activities.
Create an emergency savings. Don't confuse saving and investing. Saving is for short-term objectives or emergencies and is typically invested in assets that do not fluctuate in principal. The first step to financial literacy is to set up a savings account, money market account or laddered CDs as a safety net. This safety net should be easily accessible and represent three to six months of expenses. This not only alleviates the need to take on credit card debt or a home equity loan to get through a rough period but it also helps avoid pulling from the long-term investments and derailing your long-term financial goals. This is good to remember throughout life.
Pay yourself first. Make investing easy and automatic by having money deducted from your paycheck into your employer's retirement plan, deducted from your checking into an IRA or into an investment such as a mutual fund. In this way, money comes out and gets invested before it's spent elsewhere, thus paying yourself first. Determine how much money you can set aside to invest each month. This does not need to be a lot to start, but it needs to be steady so that it becomes a habit. Make it automatic and increase the amount at least annually.
Retirement Plans. Some Baby Boomers and the Silent Generation were lucky enough to have employers that provided income all through retirement and even health insurance. Unfortunately for Millennials and Generation X, such defined benefit plans or pension plans are a thing of the past. We are now responsible for our own future and, overall, we are unprepared. A major way that people save for retirement is through employer retirement plans. It is beneficial to take money from your paycheck and place it directly into retirement. That way it's gone before you even think about spending it. In addition, many plans provide an employer match. If there is one thing you can do to help your retirement is to always make sure you take full advantage of this benefit. It is the best return you will get on your money and even better, it's tax-free. For those that are beginning to consider pulling from retirement vehicles, consolidating accounts can make life easier. Don't forget that typically investors save pretax throughout their lives so when pulling in retirement, all of it will be taxable. This can take a chunk from the money you are pulling out.
Traditional IRAs and Roth IRAs.If you don’t have a retirement plan at work, continuing to save regularly for retirement makes sense. Take your old 401k or other former employer plans, combine them into an IRA and have money drafted from your bank account monthly so you stay on track. Mutual funds typically will allow for as little as $50 a month into an IRA account. When you retire, you may combine all those retirement accounts into one IRA to make allocations and monthly distributions easier. Have your distributions sent via ACH, which is an electronic connection with your bank account. There is no sense in this day and age to wait for a check.
Debt. To purchase a home, most of us use a mortgage. Car loans and student loans are typical too. It is important to limit ongoing debt to these types of assets. Credit card debt is BAD. There is no way around having a credit or debit card, but running a balance is a definite financial health no-no. Pay off credit card balances each month. (See “emergency savings” above to avoid this high interest debt.) Another excellent rule of thumb is to have mortgage debt paid off before retirement. Reduce the amount of monthly required income (in other words, get rid of expenses) any way you can before you retire, so that you will need less to live on in retirement.
There are many phases of life and seeking guidance from an expert will help you plan and maximize what you do financially throughout life. When dealing with investments, insurance and debt spread among many institutions, having those expert eyes take an overall view can assist in avoiding pitfalls.
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