Building for Your Future
Now that you have established financial goals and a budget, you are ready to save what you need to achieve the results you desire. Saving money is essential to meeting your financial goals. Unfortunately, saving money can be a difficult thing for some people. It’s not really that saving money is hard, but that spending money is so easy.
This module focuses on how to effectively save money for your immediate goals as well as for your future dreams and wishes.
Start a Savings Portfolio
As you know, saving money is not usually an easy task. But, with your financial goals intact, you are ready to begin. Don’t be discouraged if you can only save a little each month…a little is better than nothing. In fact, even saving $2 per day can have a great impact on your financial well-being in the future. Let’s take a look at how much you will be able to save:
- $730 after one year
- $3,650 after five years
- $7,300 after 10 years
And, that is not counting the interest that you could earn!
Pay Yourself First
The key is to pay yourself first. It is truly the best way to save. Set up a savings account where you automatically put in a percentage of your earnings each paycheck – money that you will never touch. Your earnings will then grow each month and you will feel good about the money you save.
Experts suggest saving approximately 10 percent of your gross earnings; however, if you have set financial goals and have created a manageable budget, and you can only afford five percent, it is better to save that amount than nothing at all.
Tips for Saving Money
The following are additional tips for saving money:
- Think of saving money as another monthly expense. While paying your bills, make sure to put money in your savings account each month as well.
- Set up an automatic payroll deduction directly into your savings account.
- Save all unexpected income, such as bonuses, incentives, tax returns, etc.
- Collect your pocket change.
- Participate in any type of pre-tax payroll deductions in your employment, such as a 401(k)
- Try to find a low cost alternative for some of your needs so you can save money in the end.
- Make a game out of saving; for example, see how much you can save during the month and still pay all your bills on time.
Monitor Your Net Worth
You need to figure out what resources you can draw from for your future. In order to do that, you should calculate your net worth. Just what is your net worth? It is what you are worth when you subtract your liabilities from your assets. Your goal is to achieve a positive net worth. Let’s go through this process so you have a better understanding of what we are talking about.
Step 1: Add Up the Value of Your Assets
The following lists some of the assets you may have:
- Personal Possessions
- Checking Account
- Savings Account
- Cash Value of any Life Insurance Policy
- Current Value of Investments (e.g., retirement accounts, stocks, bonds, certificates of deposit, etc.)
What is the total amount of your assets? Write it down on a piece of paper to use at a later time.
Step 2: Add Up the Value of Your Liabilities
Add up the value of all your liabilities. The following lists some of the liabilities you may have:
- Remaining Mortgage Balance
- Credit Card Debt
- Auto Loans
- Student Loans
- Income Taxes Due
- Taxes Due on Profit of Investments
- Outstanding Bills
What is the total amount of your liabilities? Write it down on a piece of paper to use at a later time.
Step 3: Subtract the Liabilities from the Assets.
The final step in the process is to subtract the total value of your liabilities from the total value of your assets to determine your Net Worth.
Review Your Net Worth
Do you have more assets than liabilities? If so, you are on the right track. A strong financial net worth will carry you through any type of financial crisis. If not, you will need to make adjustments to bring your net worth into the positive zone.
You should review your net worth on an annual basis, because things can really change in one year. Be sure to adjust your financial goals accordingly when needed.
Save for Retirement Now
Now that you understand the basics of saving for your future and the value of having a positive net worth, you need to now focus on the time when you will not be earning a regular paycheck – your retirement. Studies show that in the next 10 to 20 years (and beyond) retirement funds will be severely depleted. What that means is you will not be able to rely on Social Security for your daily needs; you will need to have your own funds to fall back on.
Furthermore, the cost of your retirement continues to get more and more expensive for two main reasons:
- We are living longer after we retire and we are more active. Some people are now spending 15 to 30 years in retirement. In fact, the U.S. Department of Labor stated that a male retiring at age 55 today can expect to live approximately 24 years in retirement. On the other hand, a female retiring at the same age today can expect to live approximately 28 years in retirement.
- Fewer companies provide traditional retirement programs and are contributing less to those plans. For example, in a typical 401(k), the employee pays for the primary amount of the fund, not the employer.
With that said, you are the one that must take responsibility for the biggest expense you will have throughout your life…your retirement. And, it is much better to begin saving for retirement today.
An easy rule of thumb is that you will need to replace 70 to 90 percent of your pre-retirement income. So, if you are making $50,000 per year (before taxes), you might need $35,000 to $45,000 a year in retirement income to enjoy the same lifestyle you are currently living. Generally speaking, the lower your income, the higher the portion of it you will need to replace.
Of course, this rule of thumb is not fitting for everyone. There are other variables that you may need to consider in your retirement planning process, such as larger medical bills, lower taxes as you age, work-related costs that may disappear, etc.
Additionally, it will depend on what you want to do when you retire. Do you want to live quietly in a low-cost part of the country, or do you want to travel all over the world? Do you plan to be active and take expensive vacations, or spend more time with family?
Back to the guidelines we provided for saving…start saving for retirement by putting away 10 percent of your gross income into a retirement fund. Then, every two to three years, you should review your plan and adjust it based on your annual earnings growth and other retirement plans.
Saving and Compounding
The name of the game for retirement saving is compounding. You are probably familiar with compounding. Money you put into a savings account earns interest. Then, you earn interest on the interest as well as the original amount of money you put into the account. Let’s take a look at the value of $1,000 when compounded over time:
Now, imagine if you add to your retirement accounts on a regular basis. This money can then compound at an even more rapid pace, helping you to meet your financial goals that much quicker.
Other Retirement Savings Tips to Consider
Let’s take a look at some other tips you should take when considering retirement savings options:
- Leave your retirement account alone unless you are adding money to it.
- When you change jobs, only rollover what you can without paying penalties. Check with your tax advisor and financial planner to make sure this is the best option for you.
- Do not borrow from your retirement account. While some programs give you this option with an attractive interest rate, do not take it. It not only lowers your savings potential, but it can also cause you to pay tax penalties if you can’t make a payment on the loan.