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The following is a guest post on behalf of Debt Advisory Centre. Enjoy!
How to Start Planning for Your Retirement Early
Planning for retirement - it might be tempting to put it off, waiting until our finances are 'more settled'. Unfortunately, like so much in life, that doesn't always happen as swiftly as expected, if at all.
Rather than simply waiting until you have cash 'to spare', you could make a point of trying to free up the cash you need to contribute to a pension or retirement fund every month. Depending on how much you're thinking of paying in each month, the changes to your lifestyle might not have to be as serious as you'd imagine.
The Importance of Budgeting
Budgeting is all about math. The more you bring in to the household - and the less you spend on other things - the more you'll have to put towards worthy goals like saving for retirement, investing in property, or simply saving up for a 'rainy day' fund.
So, how much can you afford to contribute to a pension or retirement fund every month? And what could you do to increase that amount?
As with any kind of financial commitment, it's important not to be too ambitious. There's no point committing yourself to payments which you can't realistically hope to maintain.
How Much Can You Afford?
As with any kind of financial commitment, it's important not to be too ambitious. There's no point committing yourself to payments which you can't realistically hope to maintain.
Having said that, step back a bit and ask yourself where you think you'll be financially in a few years' time. Can you reasonably expect a few payrises before then? Do you think your finances will look better by then - and is there anything you could start doing right now to make sure they do? It may make sense to get your finances in order first, so you can really focus on saving for retirement a bit later.
One of the key things that holds many people back from saving for the future is debt - every month, a portion of their salary has to go towards their debt payments. This is somewhere you may be able to make a very real difference.
How Are Your Debts Looking?
Say you're trying to repay a credit card debt. Have you actually calculated how much it'll cost you in interest (and how long it'll take you) if you stick to the minimum monthly payments? Check out a few online calculators and find out - but be prepared for an unwelcome shock!
Now revisit the question, but this time see how the figures would work out if you paid a fixed amount every month (bigger than your minimum payment) and kept making that payment as your debt decreased. One danger in repaying a certain percentage of your debt every month is that your payment will shrink as the debt does, so you'll be 'chipping away' at it more slowly.
Deciding to pay a fixed amount can help you get around this problem. It's up to you to figure out what that figure should be, but the more ambitious it is, the sooner you could get rid of your debt entirely, leaving you with extra cash every month that's really yours - and that you can put to work making sure your future is more secure.
Of course, making larger monthly payments may not even be an option if you need help managing your debt or if you can't even afford the minimum payments towards your debts every month. If you're in that kind of situation, it's vital you get back on top of your debts. Once your debts are under control again, you should be able to plan for the future much more effectively.
How about you all? What method do you use to save for retirement that you find easiest to stick to / is the most effective? What % of your income do you generally target to save for retirement each month?
For you, is paying off debt or saving for retirement a higher priority goal?
Share your experiences by commenting below!
Jacob's Thoughts - Listed below are my random thoughts as I was reading this article.
- @ Putting off/delaying planning for retirement -
- Being in my early-mid 20's, I've seen my fair share of young people who find excuses to put off saving for retirement.
- In my experiences, the most common reasons that people put this off is because 1) they have a significant amount of debt (credit card and/or student loans) to pay off, or 2) they simply don't understand investing enough to save money intelligently. This turns them off to the idea of putting away money for use a long time down the road.
- @ Saving for retirement consistently each month -
- In my opinion, saving for retirement is simply too important to put off until the last minute. Furthermore, there are numerous tax-privileged account options that make the avoidance of saving for retirement almost a foolish notion.
- The best way I've found to save for retirement and not miss contributions is to do the following: 1) Decide what % of your monthly salary you can save for retirement, and then 2) set up an AUTOMATIC, recurring, monthly deduction of that amount from your paycheck (either on a pre-tax basis or post tax if you are using a Roth IRA). The transfer has to be automatic so that you trick yourself in to thinking that you don't actually have that money in your possession.
- @ Account hierarchy / monetary needs priority order -
- Analyzing the priority at which different accounts (debt, retirement, emergency funds, insurance, etc) need to be funded is a very interesting topic.
- To address this issue in a general sense, I've developed the My Personal Finance Journey Account Hierarchy, which details the order I personally use to prioritize my funding of different needs in life.
- One question in particular that is rather difficult to address is if it is a higher priority to pay off debt (especially credit card debt) or save for retirement? On one hand, it's tempting to recommend tackling the debt payoff first since it would represent an immediate monetary savings on the interest charges. However, it would be rather demoralizing to spend your entire 20's paying off student and/or credit card debt and not have anything to show for it in retirement savings.
- Because of the complexities surrounding this question, I've decided to put together an upcoming post analyzing this topic. It should be on the way soon! Stay tuned!
- @ How much to save for retirement each month -
- The answer to the question of "how much should I save for retirement?" is about as variable from person to person as answers can get.
- In an effort to help people find an answer to this question, I developed a Google Docs Spreadsheet-based calculator, which can be accessed by clicking here. The various inputs that go in to figuring out this amount are as follows: current age, current salary, years to retirement, and your expected standard of living during retirement.
- However, as a general guideline, if you are saving 10% of your income each month for retirement, you are doing pretty well. On the other hand, if you can save 30% of your income, you are considered to be "on the road to wealth."
