We’ve all caught ourselves day dreaming of a leisurely future, thinking ahead to the days when we can stop working and spend our hard-earned cash without worrying about finances. While most of us have at least another three decades before retirement, that doesn’t mean you should wait to start preparing for it. In fact, a recent report issued by the financial services company Fidelity says that by the age of 35, you should have twice the amount of yearly earnings saved for retirement. This may seem like an impossible amount of money given all that you already have on your plate, but Cristina Briboneria, a certified financial planner and vice president of oXYGen Financial, Inc., believes that with the right set of long- and short-term goals, it’s totally doable. Here’s how to make those day dreams come true.
Make your money work harder for you
Before you even think about setting yourself up for retirement, Briboneria recommends having at least three to six months of your mandatory expenses saved as an emergency cash reserve. Once you have that in place, you can create a plan that will allow your money to start working overtime for you. Start by contributing as much as you can (the maximum for anyone 49 and under is $18,000 a year) into your employer’s 401(k) plan, especially if they agree to match it by a certain percentage or dollar amount. “Aim to contribute up to five percent of your annual income if your employer says they will match it by 100 percent,” says Briboneria. “Your company is essentially giving you a 100 percent return on your investment.”
Consider also contributing to a Roth IRA, a retirement account that lets you make contributions after taxes. Unlike a pension, annuity, or 401(k) plan, once you’re in retirement and ready to withdraw your money, a Roth IRA allows you to do so without paying taxes, which can be a particularly attractive incentive when you’re older and in need of a steady cash flow.
Examine your spending habits
Figure out how much you have coming in each month versus your fixed expenses. Anything that’s left over is what you should put towards your retirement or debt pay-down (e.g. student loans and credit cards). Consider spending no more than seven percent of your income on fun—eating out, going out with your girlfriends, shopping. Briboneria also suggests thinking about ways to leverage your spending. “Make sure that you pay your credit cards each month, but use the ones that offer points or cash back,” she says. “Stay away from store credit cards unless you plan to make a purchase and pay it off right away. The interest rates on these cards are generally between 22 to 25 percent and, as a result, whatever points or incentives they offer are negated.”
Don’t let debt destroy you
Don’t let the amount you owe on your credit cards freak you out. Handle it like a boss by paying more on the card that has the highest interest rate and minimum payments on the others. Another strategy is to pay off the credit cards with the lowest balances first, cut them up, and then tackle the beast that’s keeping you up at night. “Mentally, this gives you a sense of winning and accomplishment,” says Briboneria. “Saving all this money won’t happen overnight, but you’ve got to start somewhere. Once you’re empowered with the right information and knowledge, you can start making educated decisions regarding your financial future.”