We talk a lot about saving and retirement planning, especially for those nearing the long-awaited retirement chapter. But before these retirees get there, financial planning needs to begin years beforehand, and this applies to us, the age group called millennials.
Defined as those born after 1981, many in this 20-something camp are busy worrying about student and credit card debt, rent and bills, while some, are living in a paycheck to paycheck world without even thinking about financial planning.
Retirement seems like something for “old people” or something VERY far away.
But without setting financial goals and implementing plans now, once you’re ready to begin your retirement chapter—or even middle age—you could be in for a big dose of reality.
Failure doesn’t have to be the case. If you can implement small steps today, it may help reach your financial goals later.
Make a budget
Hopefully, if you’re living on your own (or even with roommates) and earning an income, you’ve already set up a budget that provides a monthly snapshot — a benchmark.
If you haven’t don’t panic, there are lots of tools that can help you organize your expenses and begin creating your first budget.
It’s important to do this right away so you’ll know the amount of money required to pay your bills, the sum to live within your means and the amount you can save. When you fall short, a budget will help you decipher financial challenges; then you can make the necessary adjustments.
A beginners budget formula for after-tax income includes the following per CNBC:
50 percent: Fixed expenses including housing (allocating 28 percent or less for housing expenses), food and insurance premiums.
20 percent: Financial goals such as extra debt payments, a cash fund, retirement, etc.
30 percent: Variable expenses including going out to eat, entertainment, and travel.
Conduct a Weekly State of Financial Affairs
Set up a weekly appointment to review your financial affairs whether it’s paying this week’s bills, balancing your checkbook, or putting away some money to save; this will give you an opportunity to see if your budget is working.
And if you haven’t already done so, set up auto pay for your bills. It will fee up your time and get those bills paid on time.
Save now and save often
Within your budget, you should include an entry for saving; this will create the great habit of saving systematically — it’s magical.
Most people don’t save as they make it too difficult to do so. Instead, review your budget and aim to start saving toward your financial goals by following the “pay yourself first” strategy. Under this method, set up your savings to be automated every month from your checking account to your savings account so that you save before spending money on variable expenses.
The goal is to save 20 percent of your net income—but don’t be scared by that amount. A good rule of thumb is $100 a month (or think of it as $25 per week).
Or, think of it this way: If a 25-year-old saves $100 each month for 40 years, at age 65, he/she will have approximately $150,000 (when using 5% annual returns)*.
Establish an Emergency Fund
The key word here is emergency, not a fund to pay bills when you fall short.
Through this “account,” it will give you savings should something unexpected arise (a job loss, a health issue, computer damage). Ideally, you should sock away three to nine months (six is common) of fixed expenses in this account.
For example, if you have monthly expenses of $4,000, create savings between $12,000 to $24,000. This will vary depending on your current salary, responsibilities and comfort level.
Save in Your Retirement Plan
After you’ve paid your monthly expenses, debts and your emergency fund, you should then set some money aside in your retirement plan.
A recent Transamerica Center for Retirement Studies survey showed that millennials are already doing so through their employers’ retirement plans (401(k) s): 71 percent with the opportunity to do so are participating.
How much are they saving? The median is putting away 8% of their annual salaries.
We’ve thrown a lot at you, whether it’s setting a budget, saving or paying your bills. To succeed in these activities, you’ll need to be disciplined. Just as athletes train by following a schedule and setting goals, they are disciplined, and you’ll need to do the same for your financial health.
Keep an eye on your non-essential spending (your daily Starbuck’s visit, your stop at the makeup counter or iTunes shopping) as it can quickly add up. If you spend $50 a week on these activities, that will come out to $2,600 annually. For a wage earner with a $30,000 annual salary, you could save almost 10% from it by making your coffee at home or bringing your lunch to work. The same can be applied to happy hours, snacks and impulse shopping.