You’ve graduated from college. You’ve settled into your post-collegiate independence. Perhaps you’re married and starting a family (or at least worrying about it). But you’re never very far from friends, a good bottle of wine, and many late night conversations about where your future’s headed. The one thing you and all of your friends agree on? Nobody has any idea what the $#%& to do about retirement.
How to Save (When There’s Nothing to Save Yet)
Whatever you do, never Google, “How much money should I have saved by the time I’m 30?” Reading articles like that will require more bottles of wine. It probably seems like there’s no way to catch up to where you think you should be. But instead of focusing and stressing on something theoretical, sit down and calmly ask yourself, “What small actions can I take now so I don’t have to worry as much in the future?” Making the decision to start stashing away money for retirement when you’re in your twenties is not easy, especially when it feels like you have so little leftover to begin with. You likely won’t be able to max out your 401k contributions, but there are some simple ways to control what you do now that will allow you to start saving for later.
Face Your Spending
Most people have no idea how much they spend monthly. They may know what their rent costs or how much their gym membership is, but the highly variant, one-off expenses like sunglasses or appetizers (but not wine, because wine is sacred) that happen with little thought are rarely considered. Mint.com is a free program that takes all your bank accounts, debit and credit cards, and automatically downloads every transaction. Each expense is categorized so you can see how much you’re really spending on clothes, food delivery, or nights out with friends. The results will likely make you never want to look at Mint.com ever again. But staring into your personal financial void will bring clarity on where your money is really going and help you establish a budget you can actually stick to going forward.
Pay Down Debt
Speaking of the void, you should also get serious about paying down your debt. You don’t have to do it all at once, but you do have to start doing it to put yourself in a position for financial success. Paying down high interest loans or credit cards first is always a healthy starting point. There are also certain debt consolidation programs that can be helpful in getting you organized, but be extremely careful about the fine print or hidden fees that can cost you.
Automatic Contributions – Forget About Saving
When money just sits in your checking account, are you more likely to spend it? (Yes.) Making a conscious decision to move money into a savings or investment account each month is no fun. Automatic contributions strip the hassle and thought process out of the equation. Even if the amount seems small right now, setting up automatic contributions establishes good habits and takes the pressure out of making the decision to save money. You can slowly increase the amount over time, and when you see your savings account growing month after month without really feeling any pain, it reaffirms your decision to save.
401k Contributions – It’s Free Money
Unable to max out your 401k contributions? Don’t feel bad! Most people early in their careers can’t either. So how do you decide how much to contribute? Many companies offer some form of a matching benefit. This is a specific dollar amount an employer promises to contribute to an employee’s 401k when the employee makes a contribution. For example, employers may offer to contribute a dollar-for-dollar amount up to a specific percentage of the employee’s compensation (i.e. 5%).
The first step is to see if your company offers matching contributions and how much they’re willing to match. Then see how much you’d need to contribute to get the maximum employer contribution. Say you earn $50,000 per year. Your employer offers 5% matching. You would need to contribute $2,500 per year to receive the maximum employer matching benefit. Your $2,500 ends up being a total contribution of $5,000! It’s free money! Plus, the amount you contribute to your 401k reduces your taxable income, which means you pay less taxes! That means you can still afford wine!
Emergency Plan – Expect the Unexpected
Medical bills come out of nowhere: for you, your spouse, your pet. Your car even gets “sick” and needs an unexpected “checkup.” You hate your job and want to quit. Life events creep up without notice fast. Having an emergency fund in place lets you to handle meltdowns with more clarity than if you have zero backup plan in place.
Your emergency fund should be a savings account that’s kept completely separate from the checking account you use to pay for everyday bills and expenses (and from your other savings goals). The standard is to have between three and six months of expenses stashed away in case of emergency. If you’re just starting out, give yourself a year to build it up. Set up a monthly automatic transfer to your savings account in the appropriate amount. Knowing you have safety and security behind you will take the sting out of having to invest so much time figuring out what you spend every month!
Understanding Your Options
The sheer volume of information about retirement from human resources (much less the internet) can be overwhelming and confusing. Often it seems easier to just avoid the subject altogether than actually take advantage of the available benefits. But it’s incredibly important to know and understand the different types of savings paths available to you, and how each will help to maximize your money (and ultimately maximize your values).
Most of us spend years in high school learning how to do algebra, conjugate verbs, and change into gym clothes in front of complete strangers. But the majority of us were never taught much about budgeting, saving, or taxes. Just know a little education goes a long way, and that the financial advisors at Abacus are here to help when you have questions.