Financial security is a topic we often hear about, and you probably know it’s crucial for your future and the stability of your family. But most of us don’t learn the basics of how to set ourselves up to be financially secure into our retirement years unless we take a class or have parents who show us the ropes.
Fortunately, the basics of financial safety and security are pretty simple to learn. With a little bit of discipline and planning, it’s possible to set yourself up for financial freedom for years to come.
This sounds like common sense, but you should start saving and making wise financial decisions as young as possible. If you can, establish a retirement account as soon as you begin working and contribute the maximum amount possible to the account. That said, it’s never too late to start working toward a healthier financial future. Even if you’re mid-career or older, you can still do your future self a favor by making intelligent financial decisions starting now.
Learn About and Use Tax-Deferred Accounts
Tax-deferred accounts are special funds you can establish—usually through your employer—that allow you to sock away money with fewer tax consequences. Two common types of tax-deferred accounts are 401(k)s and IRAs. Each of these accounts works differently, but it’s generally wise to maintain one of each to take advantage of their unique benefits.
Make Savings a Priority
Treat contributions to your savings account just like you treat paying a bill: It’s a monthly, non-negotiable expense. You can set up automatic direct deposits that go straight to your savings account so that you never even see the money meant for savings. With this mindset, you can think of the bill collector as your future self—and you’ll be thrilled you paid on time.
Slim Down Your Spending
Reduce your spending wherever you can to make the most of your money and put the greatest amount possible in your savings. Take stock of where your money goes, create a budget and stick to it, and cut unnecessary expenses. Consider it a form of delayed gratification. You may not be able to spend the money now, but if you save it properly, you’ll have more money to use later when you need it.
Include Your Spouse
If you’re married, your financial health is tied to your spouse’s, so you need to make sure you’re on the same page with saving and spending. Money can be a touchy subject for many couples, so make sure that you can have a respectful, calm conversation with your loved one about the present and future of your finances.
Learn the 4% Rule
The 4% rule is a basic metric to help you understand how much you’ll withdraw annually from your accounts once you retire. Therefore, it provides an estimate of how much you’ll need to save. In general, the rule states that retirees should withdraw about 4% from a retirement account per year. This rule was created using historical data on stock and bond returns in the U.S. from 1926 to 1976.
Diversify Your Holdings
Diversification is an essential principle in finance because money is spread out between different kinds of investments or accounts. This protects the assets if some kind of market turbulence hits one type of investment and not others. Some investments, such as U.S. Treasury bonds, are considered safer than others.
You can save conscientiously for your whole career, but if you have heaps of high-interest debt, you’ll still have a difficult time retiring. Some debt, like a mortgage, is difficult to avoid and can have financial payoffs down the road. But other kinds of debt, like credit cards, should be avoided. These balances carry high interest rates and don’t help you build equity the way a mortgage does. Do your best to pay off your credit cards monthly to avoid racking up large balances.
Speak to a Financial Planner
Planning for your financial future can be tricky. If you can, try finding a financial planner you trust to help you make informed decisions and educate you on all your options. These professionals are trained to help you understand your money and help you make choices, but do your research and make sure you’re choosing one who has your best interests in mind.
Making the right decisions for your financial future is an important step that requires careful evaluation of your situation and goals. These basics provide a solid foundation for making good choices today that will positively impact your tomorrow. Saving, diversifying investments, and avoiding debt are all helpful first steps to financial freedom for the long term.