Financial planning is different at different stages of life. If you are nearing retirement, you are most likely focused on planning for a comfortable retirement. People far from retirement age often want to plan for multiple situations: immediate goals, like a car or vacation; foreseeable future events like children's educations and home ownership; and later goals, like retirement. To ensure that you reach all your goals, it's important to start early and follow a financial plan.
As a younger person, you're in a great position to succeed in reaching your financial goals. You have a lot of time to save and invest for your future, but you'll only be successful if you develop a concrete plan.
Financial plans are easier to make than they are to follow. It's tempting to ignore a budget or your long-term goals when there's something you really want or need right now. But if you develop a financial plan that's realistic and easy to follow, you'll be more likely to stick with it.
Managing your existing debt
Reducing or eliminating your unsecured debt should be a priority in any financial plan. Paying off your debt is even more important than setting aside savings because debt typically grows at a rate that far outstrips the growth rate of savings.
Get your credit cards under control. Try to pay the full balance on each of your credit cards each month. If you can't do that, focus on never missing a payment and paying more than the minimum balance each month. You should also work toward paying off your highest interest cards first because those are costing you the most every month. For an informative info graphic about credit cards, visit the Consumer Financial Protection Bureau Know Before You Owe: Credit Cards.
- Consider consolidating your student loans. It'll be easier to pay all your student loans each month if they're consolidated into just one loan.
- Pay bills right away. To avoid late fees, open mail as soon as it arrives and make the payment as soon as possible. Even better, pay your bills online.
- Be patient. Depending on how much debt you have, paying it off may take some time, but it is worth having the relief of being out of debt.
Saving for financial security
Financial advisors recommend that everyone sets up an emergency fund to help with an unforeseeable financial disaster, such as job loss, illness, an unexpected tax bill, or anything else that could pull the rug out from under you. Experts recommend that people save enough to cover at least three months' worth of expenses.
You can set an emergency savings goal by looking at your fixed monthly expenses, such as rent and health insurance, and other necessary expenses, such as utilities, food and gas. Multiply this figure by three and you'll know how much you need to save. Don't feel overwhelmed by your total savings goal; you don't have to build an emergency fund overnight. Just keep adding to it as often as you can.
Saving and investing for long-term goals
Retirement savings should be your next priority, followed by saving for college if you have children. It's estimated that while a comfortable retirement now requires $1 million in savings, when today's 20- to 30-year-olds retire, the cost will be closer to $2 million - an amount that may seem unreachable, but is probably within your grasp if you start planning for it today.
Here are some investment options for retirement savings:
- Retirement savings. The Thrift Savings Plan provides retirement income to service members and other federal employees. Your contributions are tax-deferred, which means that you won't pay federal taxes on the contributions until you withdraw them.
- Savings Deposit Program. At the very high rate of ten percent interest, the Savings Deposit Program is an excellent way to grow your savings. The program is only available to service members during deployment.
- A traditional IRA. This is a personal retirement account that gives you tax advantages for saving for retirement. Contributions to a traditional IRA may be tax deductible, depending on your income.
- A Roth IRA. Unlike a traditional IRA, contributions to a Roth IRA are not tax deductible. However, while distributions (including earnings) from a traditional IRA may be included in income, with a Roth IRA, if you satisfy certain requirements, the distributions (including earnings on your contributions) are not included in income and are potentially tax-free if you meet certain requirements.
- Mutual funds. This is a common vehicle for saving for retirement. With a mutual fund, you buy shares in a fund managed by an investment firm, which in turn buys stocks, bonds and other investments.
If you have children, you may be wondering about the best way to save for college. There are a number of different college savings accounts or plans of which you can take advantage. It's important to do some research into these types of plans because they may affect your child's ability to get financial aid when applying to college.
- 529 college savings plans. 529 plans are tax-advantaged education savings plans operated by a state or educational institution. Investment gains are income tax deferred, and there is no federal income tax on withdrawals for qualified educational expenses.
- Coverdell Education Savings Accounts. ESAs operate like Roth IRAs. You make an annual nondeductible contribution to this account, and earnings grow tax-free. When it's time for college, withdrawals from the account will be tax-free if used for eligible expenses.
Though it's important to put some money away for your children's education, be sure to give first priority to paying down your debts, building an emergency fund and setting up an adequate retirement fund for yourself.
Staying on track
A financial plan only works if you stick to it. The following tips can help you stay on track:
- Make it automatic. When it comes to saving, "out of sight, out of mind" is a good rule to follow. If money that's earmarked for savings goes directly from your paycheck into an account that's not easily accessible, it'll be much harder to spend it.
- Put it in writing. Keep a list of your goals and a written plan that you can refer to. This will help you stay focused. The Military Saves program can help you set savings goals, put them in writing, and stick to them.
- Consider setting up separate savings accounts for specific goals. Most people do have separate college savings vehicles (for instance, a Coverdell Education Savings Account) and retirement accounts. But you might also consider having separate savings accounts for goals such as a vacation, car or down payment on a house.
- Put "found money" into savings. "Found money" might be a bonus, tax refund, the amount of a raise or monetary gifts you receive. Don't treat these windfalls as an invitation to spend. Treat them as an invitation to save.
- Protect against future debt. Once you've figured out what to save for and how to reach those financial goals, you'll need to keep yourself on track to get where you want to go. That means controlling your spending to avoid being sidetracked by additional unnecessary debt. Prepare a budget or spending plan so you know where your money is going.
It's not easy to sift through all the financial choices before you, nor is it easy to stick with a financial plan. But there are a lot of resources and help available to get you started on the right financial track. Visit a Personal Financial Manager on your installation or contact Military OneSource. Either can direct you to free financial counseling to help you manage your finances and save for the future.
To find out more about controlling your spending and how not to fall victim to high interest loans, check out these podcasts: Avoiding Pay Day Loans and Taking Control of Your Cash.