Photo by Harli Marten on Unsplash
You’ll never be able to retire.
Isn’t that what you secretly — or maybe not so secretly — think?
Maybe you lay awake at night fretting about your future.
Will I have enough? Will Social Security hold out? Will I be eating cat food in my golden years?
It’s true, the statistics are dismal. The media is full of stories about the looming “retirement crisis.”
According to a Bank Rate survey, 21 percent of Americans haven’t saved anything for retirement. Another 20 percent save less than 5 percent of their income.
And that is totally understandable.
The idea of saving enough money to fund a couple decades or more of not working seems almost too big to wrap your head around.
It’s overwhelming, and seems impossible — especially if you’re getting started later in life.
I remember feeling that way. At 42 and unemployed, at the peak of the 2009 recession, I didn’t have much in the way of retirement savings.
I figured I’d just work till I was 75. Most Americans who feel under-prepared for retirement believe they’ll spend their retirement years working.
But then I got serious about saving and learning about investing. Ten years later I’m well on my way to funding a comfortable retirement.
And that’s without scrimping too much.
A lot of ink gets spilled over all the ins and outs of saving for retirement. I think that just adds to the sense of overwhelm.
The truth is, it’s not all that complicated if you have the following 4 components in place:
1. Get a Budget
To build a financial foundation you MUST spend less than you earn. For many people, a budget is the way to make that happen.
With a budget, you are giving every dollar a job. A budget helps you direct your spending according to your needs, wants and goals.
There are probably as many ways to budget as there are people. What‘s important is that you find a system that works for you.
If you are new to budgeting, or if your finances tend to take on a life of their own, I suggest getting down to brass tacks with a traditional zero-based budget.
A zero-based budget involves accounting for, and directing, every single dollar that comes in the door. Rosemarie McGowan over at the Busy Budgeter has a treasure trove of information, tips, and planning materials to help you get your financial and home life organized.
A less hands-on method is to put your savings on auto-pilot, and use an app such as Mint for high-level tracking of your cash flow and expenses.
With Mint you can link up your banking and credit card accounts, and see from a glance where your money is going. You can track your bills, set savings goals, and measure your progress.
2. Get a Cushion
You need a financial cushion, a stash to tap when something unexpected comes up.
The last thing you want is to have to go into debt — either by using credit cards, or even worse, payday loans. The interest you’ll pay for the privilege will only put you further behind.
How much of a cushion you need is up for debate.
Financial planning experts recommend a wide range of emergency savings. On one extreme end of the spectrum, Suze Orman recommends people have 8 months of living expenses set aside. Most other experts seem to recommend saving three to six months of living expenses as a cushion.
Several months living expense is an excellent goal to strive for. But it’s also somewhat arbitrary, and is dependent on many different factors.
If you have high interest debt, such as credit card or payday loan debt, you may want to start with a one-month savings cushion.
Why one month?
A study by some financial economists looked into this question, and found that the average optimum savings cushion to keep a low-income household from financial disaster is about one month’s worth of income.
That’s a doable amount that will enable you to cover most unexpected expenses while you are paying off other high-interest debt, and begin saving for retirement.
3. Get Out of Debt
You should treat debt like the hair-on-fire emergency that it actually is and get rid of it as soon as humanly possible.
Specifically, consumer debt: Credit cards, payday loans, auto loans, installment loans.
Think about it this way: If you had the opportunity to earn a guaranteed 21 percent return on an investment, you’d become very rich, very quickly. Especially if you kept adding to that investment.
A credit card with a 21 percent interest rate works exactly the same way, except in reverse. The credit card company is getting very rich, and you are getting very poor — very quickly.
You should tackle high-interest debt with the urgency of your hair being on fire. Because in financial terms, that’s exactly what it is.
Student loan debt is a bit different. Interest rates are typically much lower — the average interest rate on student loans in the U.S. is 5.8 percent.
You still want to pay this off as soon as possible, but you also don’t want to put off starting to save for retirement until after you’ve paid this off.
Mortgage debt is different still. Personally, I carry a mortgage on my house, and I always will.
Today’s mortgage interest rates, especially when you include the tax deduction, are much lower than the return you should get in the stock market. Your net worth will grow faster over time by investing in the markets instead of paying off your mortgage early.
Of course there’s definitely something to said for the peace of mind that comes with knowing that you don’t owe anybody anything.
If you sleep better at night knowing your house is fully paid off, then I won’t argue with that!
4. Get in the Markets
Quit being such a scaredy-cat and get your money in the market.
Fear and ignorance are the top two reasons most Americans avoid the stock and bond markets.
There’s so much noise out there, especially in the media. One can be forgiven for thinking that investing in the stock market is too risky and too complicated for the average investor.
But consider this: According to the Wall Street Journal, the top 1% of Americans hold 85% of their assets in the stock and bond markets.
So should you.
The best way to get over the fear is to broadly educate yourself about how the markets work.
It’s not nearly as complicated as the financial planning experts like to have you think. Because if you understood how simple making money in the stock market really is, you wouldn’t need to pay them the big bucks!
Personal finance blogger JL Collins wrote the best and most entertaining primer on the stock and bond market I’ve ever seen. You might want to start with that, and then head over to Vanguard for more solid information.
A model that I use for my core portfolio is Alexander Green’s Gone Fishing Portfolio, a simple, low-cost, and safe way to invest in the stock market and build wealth for the future.
You CAN do it!
Saving for retirement can seem like an overwhelming, out-of-reach goal.
But don’t let that keep you from getting started. Because you’ll be surprised at how quickly your financial situation can change for the better.
Following these four simple steps (simple, but not necessarily easy!) will set you on the path to a brighter financial future.
- Get a Budget
- Get a Cushion
- Get out of Debt
- Get in the Markets
While I’ve laid these steps out in a fairly logical progression, it is up to you whether it makes sense to tackle them one at a time, or all at once, or in a different order.
That said, having a solid budget in place is necessary for any of the other steps to happen, but your own circumstances and psychology will determine how you approach the other three.
For example, if you work for a company with a 401k plan that provides matching up to a certain percentage of what you invest, then no question you should start there.
That is like a guaranteed 100% return on your investment. Nothing is better than that.
Generally though, it will probably make sense to focus on eliminating high-interest consumer debt first.
Wherever you are on your journey to financial freedom. Whether you are just starting out, or whether you’ve stalled out along the way, know that all you have to do is keep moving.
Forge ahead, one step at a time.
If you need help with your budget, talk to the Busy Budgeter.
If you’re in Student Loan Hell, you may want to look into consolidating or refinancing.
If you’re ready to invest in the markets, I recommend opening an account with Vanguard. It’s the only brokerage that is owned by the investors themselves, which means your interests are aligned with their interests. That’s a really good thing!