As a younger person between the ages of 25 and 40, retirement savings might not be at the top of your priorities when you begin to consider what’s important to you at this time. Let’s face it, with the current pandemic creating economic hardship for many Millennials, the idea of setting aside money for the future feels like a distant dream. That doesn’t have to be the case. Despite your current financial situation, it’s never too early to plan for the future and retirement. You can take small practical steps to begin building a solid financial foundation and a legacy for yourself and your family.
The first step as with any goal is to create a strategy. When it comes to savings, start with recognizing where you are now and where you want to be. In order to gauge your current financial situation, it is important to create a budget. I know I know, some of us cringe when we hear the term budget. Have you ever wondered right after pay day where all of your money went? Have you ever logged in to your bank account expecting to see one amount and end up seeing a balance much lower than you expected? Or worse, a negative balance? Ouch! With so many expenses stretching us, having a good understanding of your spending can help you organize and manage your income and expenses. For all of these reasons and more, budgeting can be a help in relieving unnecessary stress. Budgeting helps you keep track of your income and expenses so you know exactly what to expect each month unless of course life throws you a curve ball and presents unexpected challenges, which it always does. This is why having an emergency fund as part of your budgeting strategy is always an extremely important part of any plan. When creating a budget, make sure to list how much you earn and list what your “necessary” recurring expenses are (expenses detrimental to everyday living). Once you have an understanding and have identified the important expenses, next make a list of your discretionary spending. This is income you spend on things such as entertainment, movies, going out to eat etc. Subtract this from what you had left after all your necessary expenses were paid. What’s left? Considering your current lifestyle, it’s now time to ask yourself a few questions
1) What amount can I set aside for emergency savings
2) What amount can I set aside for retirement savings or “my future lifestyle?”
Do you have enough money to start any of these important savings? If not, it may be time to revisit your discretionary spending and ask what adjustments can I make? This is the first step in developing for yourself a savings strategy.
I always encourage clients to “pay themselves first” when they receive their paycheck. Create a budget that allows you to pay yourself first. This allows you to begin creating that emergency fund. You should have at least three to six months’ worth of emergency savings set aside to cover unexpected events such as car repairs, minor out of pocket medical cost if you don’t currently have a flexible spending account or any unforeseen childcare costs.
There are many small habits you can implement this very moment that can help you in the long run. Skipping that expensive cup of coffee for a more reasonable one or packing your own lunch from home instead of opting for an expensive restaurant. These may seem like small steps but they can help you build a savings mentality and with consistency, you’ll be surprised at how much of a difference it makes and how much you can save.
Saving for retirement can seem like an impossible drain on your already challenged budget especially when you’ve factored in expenses but it doesn’t have to be. Consider the risk associated with not being adequately prepared for your future. For most Millennials when we retire, our retirement income will depend on how much we save ourselves. We cannot rely heavily on social security. Luckily, you have several avenues you can take when considering how to start funding your retirement, some of which may include:
1) Using your employer sponsored retirement plan through direct payroll deductions. This might be the easiest way to start a disciplined approach as you do not see the money, instead it comes out of your paycheck before you receive your physical check or direct deposit. If you don’t see it, you won’t miss it. Some employers offer what is called an employer match. That is they will match your contributions dollar-for-dollar up to a set percentage. Let’s say you contribute $5 each pay period, if your employer matches your contributions, they will add an additional $5 each pay period to your retirement account. This is essentially free money that you must take advantage of.
2) Open an IRA. An Individual Retirement Account can be opened with a financial institution such as a bank or an investment company. While some will require a minimum balance to start most do not. Check with the financial institution of your choice to find out what their requirements are. An IRA allows you to contribute a maximum of $6000 a year (not to be confused with a 401K that allows $19,500) and depending on how you choose to invest, you can earn interest on your money. You can start a traditional IRA or a Roth IRA depending on your situation. You also may be eligible for a tax savers credit. Talk with your tax professional to see If you qualify for a tax credit.
3) Build your own savings account. You can start setting aside money in a savings account, most banks offer interest earning accounts to encourage savings.
It is important to note that you don’t have to make a large deposit into any of these savings’ vehicles. You can start small and build up from there, as you understand your budget and make adjustments. Like most things in life, our needs and priorities change, so if your current budgeting plan no longer helps you achieve your goals, its important to adjust as you progress. You can either adjust your spending or adjust your goals.
Finally, as you begin this journey of making good financial decisions, its important to give yourself some grace. Financial wellness and education take time and changes are inevitable but you can follow these simple and practical steps to get started on the right path.