Steps to Financing Your Future
Building financial strategies to support your goals is the best way to live a financially healthy life. If you only focus your finances on the short-term, it can make things difficult for your future. There are some steps you can take to ensure you and your family enjoy a secure financial life, both now and into your retirement. First, establish your goals. Then, follow these five steps to see them become a reality.
Step 1: Establish an Emergency Fund
Create an emergency fund. Many experts recommend having enough to cover three to six months of living expenses. Even small amounts add up surprisingly quickly: for example, if you save $20 a week, you’d have $1040 in a year, before counting any interest.
Step 2: Estimate Your Retirement Needs
A good next step is to estimate your retirement needs. One rule of thumb is to plan on a nest egg of 80% of your preretirement income minus social security and pensions. Some experts even recommend you estimate higher, because you may want to do travel extensively or take up an expensive hobby. However, a 2014 survey by T. Rowe Price found that retirees are living on less than 66% of their preretirement income, and 57% feel that they are living as well or better than when they were working. Having more time to shop efficiently and to do their own small tasks makes saving easier. Individual variables impact how much you will need but using these rules of thumb can help you determine an estimate.
Step 3: Add Saving for Retirement to Your Budget
Planning and saving for something that is several years away can seem daunting but you don’t have to do it all at once. Add saving for retirement to your budget. With a $5,000 principal, if you saved and contributed $100 per month to a mutual fund for the next 30 years, and the stock market continued to earn its historic average of 8%, you would accumulate over $186,000.
See if you are part of a pension plan at work. The amounts it would provide can go into your retirement saving calculations. Set up an Individual Retirement Account (IRA) which allows your savings to grow untaxed until distributed. Be sure to put in enough to maximize your company’s matching funds.
Step 4: Buy a House
Enjoy the benefits of home ownership. In addition to the freedom to modify it to meet your desires, it is a major investment that provides the benefits of tax deductible interest payments and equity appreciation. Even better, the gain in your home equity is not taxed unless it is huge. The Taxpayer Relief Act of 1997 modified the tax rules so that you can now make a profit of $250,000 as a single owner (or double that if you’re married) without being subject to capital gains taxes. And there is no limit; you can make these tax free profits each time you sell your home.