1. Determine your goals
Your financial moves need to be linked to your goals. If they’re not, you’ll be making moves that don’t necessarily contribute to the achievement of your goals and your overall satisfaction in life.
Do you want to buy a house, for example? Then one of your goals needs to be saving for a down payment. Do you plan to have children? Think about saving for their educational expenses down the line. When do you want to retire? The answer will give you at least a preliminary handle on how much you need to save for retirement now.
Factor in all your goals, not just clear savings goals. Do you like to travel every year? Would you like a vacation home at some point? All of those goals need to feature in your financial plan, because they affect where your disposal income goes.
2. Manage your income and expenses
Nothing gives folks a more solid financial footing than awareness of how much money is going out every month versus how much money is coming in.
You need to create a budget, itemizing both your income and your expenses by category (mortgage/rent, groceries, eating in restaurants, debt payments, utilities, and so on). Many people associate the word “budget” with economizing on everything, but that’s not what a financial budget is. A financial budget is a detailed list of your expenses for a specific period, such as week or month, compared with your income.
A budget therefore lets you know whether your income exceeds your expenses. If it does, great! Your budget will tell you how much money you have left over to save or spend on goals.
But if your budget indicates that your expenses exceed your income every month, you need to take steps to fix the situation. You need to trim expenses, raise your income, or both. If you don’t, you’ll be going into debt (or leaving bills unpaid). Either damages your financial future.
3. Match your house payments to your budget
One of your goals could well be a dream house. But be careful with the overall price of the house. If you buy a house that’s affordable on your income, it’s one of the best financial moves you can make. You build equity in the home over time and receive valuable tax breaks on the interest payments and taxes.
But if you purchase a house that’s not affordable, it could result in a financial nightmare. You’ll be cash strapped making the payments every month which could eliminate any money left over for spending toward your goals. This can erode your savings for retirement and other necessary plans.
So the lesson is: avoid buying too much house, always! Sit down and determine the entire house payment, including mortgage, taxes, private mortgage insurance, and more. You should also have a prudent cushion for house expenses and repairs, which are always ongoing.
4. Harness the power of time for your savings
Don’t wait to start saving, whatever your goals are. The longer your money is in savings or retirement accounts, for example, the more time it has to grow. The magic of compound interest is very important to savings plans for any goal.
Make sure that you maximize the compound interest available to you in both savings and checking accounts, by the way. It’s all too common to get a checking account in college that offers no savings enhancement for you, or even costs you money. Neither is prudent. Get checking and savings accounts that work for you.
5. Maximize your retirement savings
It stands to reason that receiving free money is a great boost to your financial life, right? Well, if your employer offers a 401(k) or 403(b) retirement plan or a government Thrift Savings Plan (TSP), you may have access to free money.
Many employers match the funds their employees contribute to these plans. If you contribute 5% of your income to a 401(k) plan, for example, and your employer provides a 100% match, they also contribute 5% of your income. But they won’t contribute anything, usually, unless you contribute.
So if you earn $45,000 per year and save 5%, you save a total of $2,250 annually for retirement. But with a match, your total yearly retirement savings becomes $4,500. That’s a significant difference, and over time, can power your retirement savings.
Your contributions to these funds are also taken out pretax, meaning you pay no tax on the money. This provides a significant savings (in tax you would otherwise pay), and has the potential to lower your tax bracket.
If you’re participating in an employer-sponsored savings plan and leave that employer, see what your options are. Some employers allow you to leave your money there. But that might not be the best move to maximize your savings.
You can also rollover your retirement funds and place them in retirement accounts under your control at your bank.* That way, you can manage the investments effectively. It also leaves you clear of the risk of your company going out of business or merging with another company as the decades go on.
6. Save for your children’s education
If you have or plan to have children, think about how you’ll finance their education. Higher education expenses have been rising steadily for several decades, and show no sign of stopping.
A 529 educational savings plan* allows you to save for higher education expenses and reap tax advantages while doing so. Qualified educational expenses can be quite broad, and include tuition plus expenses such as textbooks.
7. Automate your savings
Once you start to think about the multiple goals you might be saving toward – retirement, house down payment, educational savings – it might seem daunting to do.
It’s very important to sign up for automated contributions for each savings plan you have. The more you have to think about it, the more time-consuming it is.
Even more crucially, though, studies have shown that people who sign up for automated savings will save more than people who don’t. If you have to consider saving manually each month, you might find reasons not to do it. But if it’s already done? It’s done.
8. Protect against risk
Ordinarily, of course, folks go through life not thinking much about risk. But in fact, risk is part of life.
What risks are we talking about? Well, your home could be burglarized and your possessions taken. You could lose your job or be injured. You could be in an accident and, tragically, lose your life. What would your family do then?
The first step against risk is to prudently insure your possessions. If you have a car, you need car insurance. You should have homeowner’s or renter’s insurance for your possessions.
If you have a family, you should have life insurance to protect them financially.
The second step against risk is to have an estate plan. What’s an estate plan? At a minimum, you should have a will. If you’re thinking that wills are only for older people, think again. Anyone with any assets – car, home, favorite piece of jewelry or sports equipment – needs a will.
At its simplest, a will specifies where you want to receive your assets, whether it’s to a person or organization. If you die without a will (the legal term is “intestate”), there’s no guarantee that your assets will reach the person you want to receive them.
The other piece of an estate plan – and one less talked about then a will – is creating powers of attorney for financial affairs and medical issues.
A power of attorney for financial affairs gives a designated person the ability to see to your financial affairs if you are too ill or incapacitated to see to them. What would happen to your family or financial life if you had to be in a hospital for a month or so? It’s prudent to have someone who could pay the bills. When you are able to see to your affairs again, the power of attorney ends.
A power of attorney for medical affairs gives a designated person the power to make medical decisions on your behalf if you are too ill or incapacitated to do so.
If you’re thinking of a power of attorney, be sure to discuss the matter with the person you’d designate.
9. Work towards what you need to know
The tips above cover all aspects of adult financial life. They’re the building blocks, but also will determine the course of your entire financial life as it unfolds.
If you feel a bit anxious or intimated thinking about all that needs to be done, frankly, it’s only natural! It’s a lot. Start slowly, saving as much as you can and developing your life goals. Add each step as you are ready and become comfortable – while at the same time keeping in mind what there is to do.
Work With CBC Bank for Advice and Services
One of the most important steps you can take in building a healthy financial life is to work with a bank that knows you. At CBC Bank, we take the time to know our neighbors. We’ll talk to you about your goals, and work with your income and budget.
We offer a comprehensive list of banking products, including checking and savings accounts, mortgages, lending needs, retirement plan vehicles*, and more. Call us today to discuss your goals and needs.