Feeling overwhelmed by your financial responsibilities? If you’re like most, you have daily expenses on top of debt like a car payment, credit card debt and student loans. And if you plan to have a family, there’s even more to think about. You’d probably like to save for something – maybe your first home?
Try to stop worrying, and take these six steps. Then rest easy knowing you’re likely making the most of your money – and all before your turn 30(ish)!
1. Cash is King
Too often people forego the accumulation of cash in favor of investing or paying off debt. On the surface that seems smart, but experts say focusing on building cash reserves is much more important. Why? Unexpected expenses like your car breaking down or sudden unemployment can happen at any time.
“Without a solid cash amount, you’ll be left having to withdraw from your investments, incurring unnecessary fees and possibly paying more in taxes,” explains Jason Reiman, 34, certified financial planner in Arizona.
How much cash should you set aside? If you’re single, try for six months’ worth of expenses, but a year is better. Married? Shoot for three to six months’.
Seems like a reach? “I usually start with $1,000 so clients are not overwhelmed,” Katie Gampietro Burke, a certified financial planner in Jacksonville, Fla.
2. Start a Retirement Fund
The simplest and best way, tax-wise, to save for retirement is to contribute to a retirement fund whether through your employer or your own IRA. If you can afford the yearly maximum, even better. An added benefit? There’s additional benefits in it. Employers often match a percentage of your contributions to your company 401(k).
“Understanding your employee benefits is the key to success, along with knowing the match amount, vesting schedule and fees,” says Burke.
3. Build Positive Credit History
If you don’t have one, apply for a credit card. Use it regularly and make timely payments to build a solid credit history. If you’re unable to use it wisely, buying only what you know you can afford, set it up to automatically pay a regular bill that you know you can pay off each month. Then put the card somewhere safe and out of sight, so you won’t be tempted to buy things with it that you can’t afford.
“Simply use credit to make a small purchase each month, like your cell phone bill, and pay the balance off in full,” recommends Reiman.
4. Pay Yourself First
Try to save at least 10 percent of your income per year, and then earmark some cash for fun.
“As you earn more money, don’t drift toward [constant] unnecessary lifestyle purchases,” says Hui-chin Chen, 33, certified financial planner with Pavlov Financial Planning in Arlington, Va. “This way the share of saving from your income could naturally go up over time.”
Reiman encourages his clients to create what he calls a plan for fun. He says, “With a plan for fun, you will feel free to spend within reason. I recommend prioritizing 10 to 15 percent of take-home pay on fun or personal expenses.”
5. Be Wise With Your Windfalls
When an unexpected bonus or inheritance appears, don’t spend it all in one place. Sock some away immediately, so the money will grow.
“Stashing the money in a Roth IRA or setting up a separate bank account to store it can be beneficial,” Burke said.
And don’t rule out having some fun. “Consider a 50/50 approach to windfall income,” suggests Reiman.
“Save or invest half and use the other half for something fun like a vacation.”
6. Don’t Touch Your Retirement Funds
Think twice before borrowing from your 401(k) plan. A loan could be considered an early distribution, which is subject to income tax and a stiff penalty.
“Build your cash reserves and replenish them conscientiously so borrowing from your 401(k) never becomes necessary,” Burke says. If needed, consider a personal loan and only borrow from family as a last resort.
