At this point in life, many of us are working tirelessly to create a solid financial future for our families. You can’t build that future on a house of cards. There are five fundamental building blocks that you must follow in order to get to the place you imagine you’ll be in 10, 20, 30 years. Take action on these 5 tips today:
Make sure you are debt-free before worrying about saving for retirement. You will have more financial freedom and flexibility in your life if you pay off your debt (student loans, auto loans, credit cards, etc.) before saving for retirement – The one exception to this rule is if your company matches your 401k contributions. If they do, you should invest the minimum amount required in your 401k to receive the full match since the company match is in essence free money.
You should create a spending plan and implement the debt snowball to eliminate your debt. (I have written a blog on this very topic – http://johnchladek.wordpress.com/2010/01/10/eliminate-debt-in-2010/ )
Don’t use credit cards. If you currently have debt, you are just making the situation worse if you continue to use a credit card. The only way to change your spending habits is to go “cold turkey” and only use cash/debit card.
If needing to buy a vehicle, look for a 2-3 yr. old used car instead of buying new. A Consumer Reports study of owner costs shows that choosing a three-year-old car instead of a new one can save you thousands of dollars over the first five years. You can also save a lot of money buying a used car instead of leasing. A lease is giving you the luxury of a new car every 3 years, but you are constantly paying interest on the lease. Also, in most cases, you will be paying fees at the end of the lease for excess mileage since most leases allow for less-than-average travel each year.
Invest in your 401k before using other savings vehicles. In 2010, investors are allowed to save up to $16,500 in their 401k (Individuals over 50 can save up to $22,000). This money is saved pre-tax, which means it isn’t included in your taxable income for the year. The earnings inside of the 401k are also tax-deferred, which means you are not taxed on them until you withdraw the money.
Always have an emergency fund. The minimum you should have saved for emergencies (house repairs, car repairs, medical bills, etc.) is $1,000. Ideally, you want to have 3-6 months of your total expenses saved. The reason for this is that in the event you lose your job or some other situation arises, you want to have money set aside that can support you instead of having to use credit cards or take out loans.
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John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit https://www.chladekwealth.com.