1. Build an Emergency Fund
Before starting, we suggest going old school – break out your favorite pen and paper and prepare to write down your goals.
After all, there is immense benefit in writing down your goals – a study by Dr. Gail Matthews found when you write out your goals, you are 42% more likely to accomplish them. We like those odds!
So where should you start? Here’s another suggestion: with the unexpected.
Life inevitably throws surprise expenses our way and many are left unprepared. Unfortunately, most Americans don’t have sufficient savings in case something goes wrong.
And the pandemic only exacerbated the problem. A recent Bankrate survey found that nearly three times as many Americans have less in their emergency fund now versus when the pandemic started – and only 16% cite being “very comfortable” with their emergency savings.
So what exactly is an emergency fund?
Emergency Fund Basics
An emergency fund or rainy day fund is essential to protect your assets, lower your financial risks, and give you peace of mind. If the last few years have taught us anything, it’s that the world can be turned upside down with little warning.
Most people benefit from having three to six months’ worth of expenses saved in an accessible, liquid account. But you might want to customize that general recommendation based on your own situation. For example, if you’re self-employed with fluctuating income, you may want a heftier emergency cushion to help in leaner times.
Some options for storing your emergency cash could be a high-yield savings account, money market account, or other “safe” and highly accessible vehicle. It’s generally best to keep your emergency savings out of the stock market due to its volatility.
Your emergency fund is there to help out when life doesn’t cooperate – an unexpected lapse in income, medical emergencies, costly repairs, unanticipated bereavement expenses. When you have a cash cushion to fall back on, it also helps keep you out of debt by preventing you from putting payments on a credit card, borrowing from the bank (which is more expensive with inflation), or asking family or friends.
Why Emergency Funds are So Important
Having a significant dollar amount set aside in your savings account will let you sleep soundly, knowing you and your family will be taken care of in the event of a surprising calamity or expense.
Setting money aside is also a great way to gain confidence in your financial independence.
While you may only have a small amount of money to contribute initially, it’s essential to start building your rainy day fund, ensuring you’re prepared for any unexpected costs.
Remember, your emergency money is there to help you in a genuine bind, not to cover routine or pesky expenses like property taxes, minor home fixes, or auto repairs. It’s important to save for those costs separately and reserve the emergency fund for, well, emergencies.
If you do have to use the money, make plans to replenish the fund. Even setting aside a little money per month to pay it back will eventually go a long way.
2. Prepare for a Fulfilling Retirement
Saving for retirement is one of the most essential savings goals because the amount we save determines what kind of a lifestyle we can have in our golden years.
It may not seem like it now, but you can’t work forever. It’s imperative to check in with yourself and answer questions that will guide your savings and keep you motivated to stay consistent:
- What items are on my retirement bucket list?
- How do I want to spend my time in retirement? What will it cost?
- Do I want to travel? What is a reasonable annual travel budget to fit my lifestyle?
- What kind of a legacy do I want to leave for my children?
Through self-analysis, you can focus on what matters most to you, visualize the future you desire, and create concrete monthly savings goals.
But that’s easier said than done. Less than half of Americans are meeting their savings goals. Data from the Natixis Global Retirement Index found that 59% of Americans will have to keep working beyond their planned retirement to afford leaving the workforce.
It’s easy to put saving for retirement on the back burner, thinking it can wait for the next decade. But if you start saving earlier, the results can be far more rewarding, especially by taking advantage of compound interest.
Plus, saving early has never been more critical. Average life expectancy is increasing, Social Security is experiencing challenges, and inflation is reaching peak levels. Given these headwinds, one of the best ways of saving early is contributing to an employer retirement plan.
Invest in a 401(k)
You’ll want to ask your HR department about available options such as a 401(k) or 403(b), and you’ll also want to check if your employer matches a percentage of your contributions. If there is a match, you should contribute at least enough to get the entire match. Why? Because it’s free money!
That said, to adequately prepare for retirement, you’ll likely need to save well above any employer match. Many people aim to save 15% to 20% of their pre-tax income for retirement. Even though it may seem steep, it’s a savings goal you will thank yourself for in the future.
Remember to increase your contributions annually and after every raise until you can max out the account. In 2022, you can contribute $20,500 to a 401(k). If you’re 50 or older, you can add catch-up contributions up to $6,500.
Consider IRAs
But employer-sponsored plans aren’t your only retirement savings option. You could also save in an individual retirement account (IRA). This year, you can save up to $6,000 (with an extra $1,000 if eligible).
Pro tip: If you do a rollover (this transitions an old 401(k) into an IRA, for example), you can exceed the annual contribution threshold.
In general, there are two main types of IRAs: traditional and Roth. The difference is how the IRS taxes the money. A traditional IRA mirrors a 401(k) – pre-tax contributions, tax-free growth, and taxable distributions in retirement.
A Roth IRA works differently. The money you put in the account is after-tax, so you pay tax on the money up front. But the gains grow tax-free and qualified distributions remain tax-free. Investing in Roth accounts, especially when you’re in a lower-income year, can be beneficial. Keep in mind that there are income limits when contributing, so check the IRS rules for parameters.
Proactively Save for Your Health With the HSA
Another excellent retirement-adjacent savings account to consider is a health savings account (HSA). The HSA is a specific vehicle designed to help people save for medical expenses.
HSAs are unique because they offer triple tax benefits – contributions, gains, and qualified distributions are all tax-free. Plus, the funds in the account roll over every year, making it an excellent long-term investment.
The catch? You must be enrolled in a high deductible health plan to contribute to the HSA.
3. Repay Any Outstanding Debts
Debt is one of life’s biggest stressors – it can feel like a heavy load, holding you back from your true potential. A NerdWallet report found that the average American household has more than $150,000 in debt.
This shocking statistic shows how much debt has become accepted as a cultural norm. And yet, it doesn’t have to be that way.
Eliminating debt is possible with consistent saving and discipline.
One of the best benefits of eliminating debt is the opportunity to increase your credit score. Doing so creates an immense opportunity to improve your financial well-being in many ways:
- Improve eligibility for credit cards with the best benefits
- Qualify for a mortgage
- Take out a business loan
- Get better rates on car insurance
- Qualify for a lower credit card interest rate
If you carry a lot of debt with big monthly payments, it cuts into things you may want to spend money on. Paying off your debt sooner will free up cash to spend on things you want, like a dream vacation or a new car. If you pay for these expenses before paying off your debt, it can keep you trapped in debt until you can’t borrow anything more.
Plus, you can redirect some of the costs to investing in your future – retirement, a child’s college fund, and more. Beyond enjoying vacations or cars, paying off debt brings peace of mind all on its own knowing that you have plentiful resources to rely on.
It’s best to create a monthly cash flow plan (or, if you’re brave, just call it a budget) to pay off your debt as quickly as possible. Try paying more than the minimum monthly payment for those outstanding bills. Though it may feel constricting at first, it will give your future self the gift of financial freedom. You will be able to rest easy knowing you don’t have to compromise your lifestyle because you took out loans earlier in life.
Paying off debts sooner than later has an immediate financial benefit because you will likely pay far less interest. Let’s look at an example:
Say you owe $100,000 on your house with a 3% interest rate. If you pay it off in 30 years, you will pay over $50,000 in interest alone. If you pay it off in 10 years, you will only pay $15,000 in interest. It’s still a pretty penny, but you will have saved about $35,000 – enough to pay for a year of college or invest elsewhere.
So whether it’s credit card debt, a mortgage, a car payment, or student loan debt, bring some mindful change to your financial life and create specific savings goals that help you pay off your debts promptly.
Leaving the “I Can’t Save Right Now” Mentality
Saving is the ultimate test of self-control, and there will always be excuses to postpone it. However, there are clever ways to start saving despite these drawbacks.
People often think, “I have time, I don’t need to start saving yet!” However, there’s an immense benefit to starting early: having that extra time for retirement savings to compound can make a significant difference. Start saving for retirement early and watch your money bloom.
Even if you’re new in your career and your income is relatively low, there are money moves you can make to create space in your budget for saving:
- Set up a separate savings account
- Analyze your expenses and cut out any unnecessary spending
- Create a concrete cash flow plan/budget and hold yourself to it
- Begin contributing to an employer-based retirement plan like a 401(k)
You may feel like you don’t know where to start, but that’s where we can help. An Abacus financial advisor can guild you through the steps to meeting your savings goals and give you tools to enjoy the things that matter to you most.
Schedule a free introductory call today to get started.
