“Begin with the end in mind.”
It’s a classic piece of advice culled from the pages of Stephen Covey’s seminal book “7 Habits of Highly Effective People.”
It also happens to be great guidance for people who are planning ahead to retirement.
Though it may be years off, retirement has a definite time horizon and you need to understand what it is in order to plan for it.
How much should you be saving for retirement?
There’s an often-told story about money expert Clark Howard that also happens to be true: When Clark was a young man, he lived on every other paycheck.
Most financial planners will tell you to save between 10% and 15% of your income for retirement. If you’re really ambitious, they might advise you save 20% to 25% if you can swing it.
But Clark’s person brand of frugality meant that he had a personal savings rate of 50%. That’s a big part of what allowed him to retire in 1987 when he was 31.
So the answer to question of how much you should be saving for retirement is that it depends. How long do you have until your desired retirement age? That’s a more meaningful question.
It offers an easy way to get your head around the question of saving for retirement. It also shows the power of saving and how it can buy you years of freedom away from work. If you bump up your saving rate from 10% to 20%, you’ll enjoy 14 extra years in retirement. That’s huge!
(The numbers assume a 5% return on your money annually after inflation and that you don’t exceed 4% annual withdrawals during retirement.)
Maybe you’re not saving as much as you’d like to be right now. That’s OK. You have to start somewhere and then you can build up from there!
Here are some general tips to help you create a better financial future for yourself and your family.
Follow this basic guidance for a better financial future
You have to save money
It’s tempting to want to spend everything you earn, but that’s not the way to build a sound future. It’s critical to save.
Saving a dime out of every dollar you make is a good rule of thumb provided you’re in your early 20s and have enough years ahead of you, as the chart above shows. But it’s never too late to start saving even if you’re over 40.
The money you set aside will give you more freedom to make choices, like taking a lesser-paying job because you love the work, or starting a business.
Invest for the long haul
Sometimes people are afraid to buy stocks because they see them as too risky, but you need your money to grow faster than inflation to build your buying power. Another mistake people make is selling their mutual fund shares when the market is down.
If you buy low-cost index funds regularly, such as through a 401(k) plan, and keep doing so whether the market is up or down, you’ll build wealth over time. The markets may have a bad year or two, but they invariably rise over the decades.
Keep debt to a minimum
When you owe money on your credit cards or on an expensive car loan, you’re a financial prisoner, giving your hard-earned money to a lender every month to pay interest.
Pay your credit cards off every month and keep your debt to the bare minimum and you’ll have more to save or to spend on the things you really want.
Buy a house
Despite the post-recession housing crash, buying a house remains an excellent way to build wealth over time. In fact, with interest rates still low, housing is incredibly affordable.
Paying rent puts money in someone else’s pocket. Buying a house means paying down your mortgage balance a little bit every month and seeing the value of your house grow over time, with the ever-widening gap between the two — known as ‘equity’ — being yours to keep.
Keep your cars for a long time
Cars are expensive, and they lose value over time. So they are an expense, not an investment.
If you buy or lease a new car every few years, you’ll never stop making payments. If you buy a sensible used car, pay it off and keep it for years after the loan is done. Then keep making the monthly payments to yourself. You can then save up money and either pay cash for your next car or make a huge down payment and take a tiny loan.
If you buy new, be sure you keep it for a minimum of 10 years. For used vehicles, a good rule of thumb is to buy a two or three year old car and keep it for three to four years.
Keep a good credit rating
Nothing good comes from having a bad credit rating. It’s hard to get a mortgage or a car loan, and you’ll have to pay a higher interest rate if you do.
Pay your bills on time and don’t use too much of your available credit. Also, don’t forget to check your credit report for free at least once a year at AnnualCreditReport.com.
Spend your money wisely
If you shop for good prices on the things you have to buy and don’t waste your money on things you don’t — from $6 cups of coffee to cutting-edge electronics — you’ll be way ahead of the game.
Keep a budget and use a free online program like Mint.com to track your spending and make adjustments when you slip.
Traveling is one of the great joys of life, and you can do it without going to the poorhouse. Look for airfare, hotel and car rental specials, and try to be as flexible as possible in your travel dates and where you choose to go.
Buy what’s on sale and save, just like at the supermarket. And you don’t have to eat in a fancy restaurant every day you’re on the road. Rent a home with a kitchen through Airbnb.com and cook for yourself, or grab a sandwich at a deli and have a picnic.
Don’t let companies take advantage of you
Persistence is the key when you have a consumer problem. People who are persistent usually win. People who give up in frustration generally miss the chance to have the problem resolved to their satisfaction.
You don’t have to change your financial habits all at once
Each year, make more good decisions and fewer bad ones, and over the years you can steer your finances in the right direction.