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How To Start Saving Early For Retirement

How To Start Saving Early For Retirement

Many young people don’t think about starting a retirement fund because retirement is decades away. However, in order not to overwhelm yourself when you’re older, it’s a sound idea to start saving now. You can start small, so that your savings will grow over time. You can also start to increase your savings as your income increases. Follow these tips to secure your financial future.

Know Your Retirement Needs

The first thing to know about retirement is that it’s expensive. But don’t worry too much, because for young adults, it’s still quite far away. However, this doesn’t mean that you avoid saving now. You need at least 70 percent of your pre-retirement income to maintain your standard of living when you stop working.

To set benchmarks of what that amount will look like, you should save one times your current salary by the time you’re age 35. By the time you’re 45 you should save three times your current salary, and by the time you’re 55, you should save five times your current salary. You should have eight times your ending salary by the time you retire.

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Start Contributing to Your Retirement Fund Now

Even if you still have debt you’re paying off, like student loans, it’s important to start saving for retirement. Young people should be saving for retirement simultaneously with paying down debt. It may seem impossible, but your secure financial future is just as important as becoming debt free.

See if your company has a 401(k) plan. Most employers pay 50 cents for every dollar you put toward your retirement savings, up to the first six percent of your salary. It’s a 50 percent return. Money in 401(k) or IRA benefits from a lifetime of tax-free compounding.

If your company doesn’t have a retirement fund, use a Roth IRA, instead. You fund it with the money that’s already been taxed as part of your normal paycheck, but when you withdraw it later, it’s tax-free.

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Find Ways to Save

Find small ways to save money and budget for your current income. Little lifestyle changes, like making coffee at home instead of getting a cup of coffee at a coffee shop can save you almost $100 a month. When you bring your own lunch to work, you save almost $10 a day. Look to create a budget that will regulate your spending in different categories, including food, entertainment, gas, utilities, rent, and so on.

If you’re paying off student loans, opt for income-based repayment of your federal student loans instead of a standard plan. It can help — if you make $50,000 and owe $30,00, for example, you’d reduce payments by $68 a month.

Don’t Overwhelm Yourself

For savings and retirement fund contributions, start small. Contribute a modest amount and then increase yearly, and as your income increases. Start by contributing three percent of your salary, then bump it up by a percentage point a year until you’re up to the recommended savings rate of 10 percent.

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Invest in Stocks, Bonds, and Annuities

Investments are a smart way to make money on your money. Stocks typically grow at an annual clip of 10.4 percent, while bonds historically return 5.4 percent a year. Be aggressive and put 90 percent of your investments in stocks, interchangeably referred to as equities.

Hedge against risk of loss by diversifying your investments to own as many different types of stocks as possible. Life-cycle mutual funds make it easy for novice savers to buy a diversified array of stocks that are tailored to their age and retirement goals.

There are other retirement specific investments to look into as well. Annuities are financial products sold by financial institutions designed to accept and grow funds from an individual. Upon annuization, the annuity pays out a stream of payments to the individual at a later point in time (usually retirement). They’re used to secure a steady cash flow for an individual during retirement. To calculate possible annuity amounts, use the annuity calculator.

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Hybrid annuities are becoming increasingly popular. In essence, hybrid annuities are insurance contracts where buyers can use fixed and variable annuity components to allocate funds. They’re a fixed index annuity with one of the newer, more innovative income riders. They resolve the concerns about asset growth and retirement income, like long-term care funding or wealth transfer to heirs, while still providing the owner with a secure income.

 

Retiring doesn’t have to be scary or overwhelming if you start saving early. Don’t end your career depending on social security to support you. Continue your standard of living well into your older years, and enjoy your retirement.

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Last Updated on September 2, 2020

How to Set Financial Goals and Actually Meet Them

How to Set Financial Goals and Actually Meet Them

Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

In this article, we will explore ways to set financial goals and actually meet them with ease.

4 Steps to Setting Financial Goals

Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.

1. Be Clear About the Objectives

Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.

It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.

Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.

2. Keep Goals Realistic

It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.

It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.

3. Account for Inflation

Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.

Therefore, account for inflation[1] whenever you are putting a monetary value to a financial objective that is far into the future.

For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.

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4. Short Term Vs Long Term

Just like every calorie is not the same, the approach to achieving every financial goal will not be the same. It’s important to bifurcate goals into short-term and long-term.

As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.

By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.

How to Achieve Your Financial Goals

Whenever we talk about chasing any financial goal, it is usually a two-step process:

  • Ensuring healthy savings
  • Making smart investments

You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.

Ensuring Healthy Savings

Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.

This is the focal point from where you start your journey of achieving financial goals.

1. Track Expenses

The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.

Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.

If you’re not sure where to start when tracking expenses, this article may be able to help.

2. Pay Yourself First

Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!

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Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.

The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.

Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.

3. Make a Plan and Vow to Stick With It

Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized

Nowadays, several money management apps can help you do this automatically.

At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.

Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

4. Make Savings a Habit and Not a Goal

In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:

  • Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
  • If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
  • If you go shopping, always look out for coupons and see where can you get the best deal.

The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.

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5. Talk About It

Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.

Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

6. Maintain a Journal

For some people, writing helps a great deal in making sure that they achieve what they plan.

If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.

Making Smart Investments

Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.

1. Consult a Financial Advisor

Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.

Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.

2. Choose Your Investment Instrument Wisely

Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.

Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference[2].

As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.

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3. Compounding Is the Eighth Wonder

Einstein once remarked about compounding:

“Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”

Use compound interest when setting financial goals

    Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.

    Start saving early so that time is on your side to help you bear the fruits of compounding.

    4. Measure, Measure, Measure

    All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.

    If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.

    Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

    The Bottom Line

    Managing your extra money to achieve your short and long-term financial goals

    and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.

    More Tips on Financial Goals

    Featured photo credit: Micheile Henderson via unsplash.com

    Reference

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