Whether you earn a salary or an hourly rate, you work hard for your money. As much as you might enjoy what you do, you probably don't want to work forever. This is why it's important you begin saving for retirement today.
Think you need a six-figure salary to retire comfortably? No way. With a smart financial plan and a healthy dose of discipline, you can achieve your goals faster. Here are some tips.
Set a Goal
Know how much money you need to set aside to comfortably retire at the age you choose. Take into account the fact that your home should be paid off and your kids should be living on their own. During retirement, you'll need to cover living expenses and have enough discretionary income to align with the lifestyle you choose.
When deciding how much money you'll need to set aside, factor in your current age and desired retirement age. The longer you have to save, the less you have to put away monthly. Assume a reasonable annual rate of return on your investments, such as 7%. For instance, say you're 35 years old and want to retire at age 65 with $1 million to live on. With a 7% annual rate of return, you'd need to invest around $900 per month. If you delay retirement till age 70, you need to save about $650 per month to reach your $1 million goal. Be sure to invest in a mix of mutual funds, stocks, bonds, CDs, annuities, or other investment vehicles that fit your goals and risk tolerance.
Track Where Your Money Is Being Spent
Finding out where your money is going helps you figure out which areas you can cut your expenses in. This frees up part of your income to invest for the future.
Spend two months using a spreadsheet, paper and pencil, financial tracking software, or other method to record everything you pay for. Include a monthly estimate for ongoing expenses such as car repairs, holiday spending, and homeowner's or renter's insurance. For every expense you didn't need to create or wouldn't choose again, highlight it red. Top priorities that can't or won't change, such as a lease agreement, highlight green. Everything else, highlight yellow. Anything red, stop spending on these items. Green items, continue to pay for. For yellow expenses, figure out which low-priority items you can do without. Stop purchasing them.
Create an Emergency Fund
It's important you set aside money in a savings account or money market account to cover unexpected expenses. Whether your car breaks down, you have a surprise hospital visit, or you lose your job, having three-to-six months' expenses in an emergency fund helps cover your bills. This prevents you from putting unplanned expenses on a credit card and adding to your debt load. It also provides peace of mind, knowing you can stay on track for retirement.
Snowball Your Debt
Make a list of your debts. Order them from highest interest rate to lowest interest rate. Except for your debt with the highest interest rate, pay the minimum amount. On your debt with the highest interest rate, pay as much as you can beyond the minimum each month. Once this debt is gone, repeat the process for your next debt with the highest interest rate. Add the money you had been paying on the earlier debt to accelerate paying off the second debt. Repeat the process until your debts are paid off.
Invest in Qualified Retirement Plans
Put as much money as possible into qualified retirement accounts. These accounts offer tax-deferred compounding, meaning the longer you leave the money in the account and let the interest and dividends add up, the more money you have to retire on. You may benefit from tax-free withdrawals, such as with a Roth IRA, or potential tax deduction when you make a retirement plan contribution, such as with a traditional IRA. If you're age 50 or up, you can put away more money in a 401(k) and/or IRA than employees in other age groups.
Be sure to invest in your 401(k) a minimum of your company match. For instance, if your employer matches 401(k) contributions up to 4% of your salary, and you earn $40,000 per year, put a least $1,600 per year into your account. Your company will put in an additional $1,600 each year that you do. Over 10 years, this adds up to an additional $16,000 set aside for retirement that you didn't contribute yourself.
Pick up Temp Jobs
When you supplement your income through temp jobs, you gain additional money to put away for retirement. This accelerates your savings and can help you reach your goals faster. The more money you have put away, the sooner you can stop working - and retire comfortably.