I'll save next month." "I'll put away money after I buy a new (fill in the blank)." "There's never anything left over after
I pay my bills." Have you ever used any of these excuses to put off saving for your future? I know what you're thinking. Retirement
is a long way off, and with any luck you'll fund it with lotto winnings, an inheritance from a distant, wealthy relative,
or pennies that fall from the sky.
When money's tight, it's easy to understand why retirement doesn't top your list. Making ends meet each month takes priority
over the distant future. Many people wage a constant battle between saving, investing, and paying off debts. Others are focused
on short-term goals like a car or home purchase, saving for college, or putting money aside for that much-deserved vacation.
Saving for retirement gets lost in the shuffle to keep up. A better strategy: Start small and start now.
Start with fertile ground
Just as you till before you plant and plant before you harvest, you must lay the groundwork for fruitful investing. Before
you invest for retirement, use these steps to prepare so you can maximize your growth: - Ensure adequate insurance coverage. Illnesses, accidents, fires, burglaries, and other tragic events can wreak havoc on your financial future if you lack sufficient
insurance coverage. These risks are so great you can't bear them alone—you must transfer the risk to an insurance company.
As you calculate your risks, also ask yourself whether your spouse or dependents would enjoy a reasonable quality of life
if you died. If you answered "no," you may need more insurance.
- Wipe out credit card and other bad debt. It's almost always a good idea to get rid of credit card and other high-interest rate loans before you invest for retirement.
When you retire debt, you effectively earn the rate you would have otherwise paid. For example, by paying off that 20 percent
interest credit card, you're making a guaranteed, risk-free 20 percent. That makes it a no-brainer priority over investing
for retirement. There's one exception: If your employer offers a retirement plan that will match your contributions up to
a certain level, contribute up to that level—even if you have credit card debt—because you're getting a 100-percent guaranteed
risk-free return on your investment.
If you're considering paying off mortgage and student loans early at the expense of investing for retirement, think again.
These debts typically carry a reasonably low interest rate and offer some income tax advantages, so it's better to focus on
investing rather than eliminating these debts quicker.
- Build a modest cash cushion. Emergencies happen—your car needs a new muffler, the basement floods, your cat needs emergency surgery. When you create a
modest cash cushion, you won't need to pay these inevitable but unexpected expenses with a credit card. This emergency fund
should cover three to six months of living expenses and be accessible to you within 24 to 48 hours. Your job security and
the flexibility of your monthly expenditures should determine the exact amount to set aside. If you can rely on family or
friends or a home equity loan to initially pay for the expense, include those options when estimating how much cash you'll
need to save. Then transfer that amount from your checking account to a savings or money market account to put it a bit out
of reach and earn interest.
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