Long term financing goals... Doesn't sound as exciting as long term stay at the beach, does it? Truth is, long term financial goals don't offer immediate rewards. Rather, you have to look at them like seedlings turning into a robust vineyard.
If you want to stop working at some point or avoid a potential crisis when unemployment hits, then you simply have to embrace certain types of financial goals as friend, not foe. When the COVID crisis hit, over 14 million Americans faced the unemployment line. How many of those Americans do you think had six months' worth of income stashed away? Not many.
Most of us live paycheck to paycheck, with little to no savings and zero retirement planning. That's not living on the edge. That's living in the quicksand. If you're still gainfully employed during these tenuous times, we encourage you to embrace five financing goals that will leave you well-positioned to tackle anything from dental trouble to a million-dollar retirement savings plan. Let's take a look.
1. Diminish Debt
Debt is like a revolving door. If you can never seem to get out of it, then you're doing something wrong. Credit cards come with a ton of great perks, like cashback on purchases, airline miles, and more.
But, it's not wise to carry a huge revolving line of credit. It's also unwise to merely pay the minimum balance each month and allow interest payments to accrue.
If you can't pay your card off at the end of each month, you probably don't want to keep swiping it. The thing about credit card debt is it's kind of like pouring sand into a jar with a hole in the bottom.
It prohibits people from saving for themselves because, how can they build a savings fund when they're so far in the hole to someone else? So, if debt's your problem, the first thing you want to do is stop accruing more debt.
Then, it's time to see how you can scale the mountain. Here's the best way to armor up and take down debt:
- Track your spending (down to the penny). See where you're wasting money that can be directed toward your "get out of debt" plan. A daily dollop of self-control can stack up greatly in the monthly scheme of things. Consider your convenience store runs, coffee stops, and weekly lunch dates to start.
- Create a budget. Allocate every penny of your weekly or bi-weekly paycheck. Hold yourself accountable to that budget. If you need to eliminate the vacation fund for a year, do it. If you need to forego your $50/week restaurant budget, do it. Releasing yourself from the burden of debt is worth tightening the budget for at least a year.
- Check your interest rates. Things like student loans and mortgage payments typically come with low interest rates. It's not uncommon to see anywhere from 3% to 5%. Credit cards, however, can soar upwards of 19%. That's why you're going to want to go after those kinds of debt first. Paying too much interest is like throwing away money each month. So, that high-interest rate card needs to be tackled first.
- Check your balances. The other factor that matters is your balance. Once you know which cards have the highest interest rate, you're going to want to tackle them in order from worst to best. Sometimes, the impulse is to get rid of the cards with small balances first. But, you actually want to go in the opposite direction and take down the biggest offenders first.
Why does this work? Well, let's look at the numbers. Say you have three major debts. If you're able to up the ante and allocate 20% of your monthly income to this endeavor, you're looking at a pretty good strategy.
For someone who earns $3,000/month, that's about $600/month. What you want to do is direct $100 to one, $100 to another debt, and $400 to the largest debt. As you pay off one, maintain that same $600 and use it to attack the remaining two, then the last one, and then... dare we say it... you're free.
2. Spend Less, Save More
We know, we know. How cliché. But, the thing about clichés is that they're often repeated because they're often true. If you're still living paycheck to paycheck, be afraid, be very afraid. Given the tenuous times we live in, families need to have an emergency fund set aside for at least six months.
If you and your spouse have things like restaurants and pocket money in the budget, slash them right away. Make 2020 the year that you feel proud that you've been able to account for every dollar in your budget. What else can you do to spend less and save more?
- Stop the unnecessary shopping. If you need to delete the Amazon app form your phone, do it. If you remove the instant gratification temptation from your fingertips, you may be more successful. Stop "hunting for bargains," too. We tell ourselves we actually saved money when we spent $25 on a sweater that was marked down from $75 (when we didn't even need the sweater).
- Pay with cash only. If you need to drive down to the local Walmart or Target to pick up a few household items, limit yourself to a certain amount of cash. This will do a couple of things. First, it will prohibit the impulsive shopping. Second, it'll force you to only buy the things you need. Plus, there's something psychological about handing over cash vs. swiping a card. You feel it more and will be, in a perfect world, less tempted to go overboard.
- Shop Smarter. Whether you're a household of two or seven, grocery shopping is expensive. So, it's time to shop smarter in this arena. Shop according to the sales ad and don't be afraid to clip your coupons and use them at the checkout line. Fifty cents here and twenty cents there adds up to tens of dollars over the course of a month and guess where that can go? To that debt you're trying to eliminate.
With the ability to save more, you're opening yourself up to a host of scenarios that will give you tremendous peace at night. First, you can establish a thousand-dollar emergency fund. This is for anything from dental work to ductwork in the house. It's also for the four new tires your vehicle is going to need at some point.
Second, you can establish a safety net. COVID has been a major wakeup call for those of us who live paycheck to paycheck. Imagine you were able to save six months' worth of income? That would make the nail-biting stop almost instantly. If you pull down $3,000/month, that's $18,000 and no small feat.
But, if the worst thing were to happen, and you become unemployed, you don't have to drop down into panic mode. Instead, can sit pretty on nearly $20,000 that can be economically balanced if tough times hit.
3. Get Ready for the Golden Years
The days of pensions are fading further and further into the distance. And Social Security was never designed to be someone's primary source of income upon retirement. So, that needs to be supplemented if you want to be able to enjoy your retirement more fully.
An IRA is the standard way to meet your retirement goals. And there are two different options here:
- Traditional IRAs offer tax-deferred growth. That is, like an HSA, your contributions are tax-deductible in the year you make them.
- Roth IRAs allow you to withdraw funds without a tax burden. So, if you think you'll need to withdraw from your IRA sooner than later, then you might want to pay your taxes upfront and have access to it whenever necessary.
We used 20% as a viable example of getting out of debt. So, what's a good goal for an IRA? Well, let's start with the best-case scenario. Right now, the IRS caps the maximum contributions to traditional and ROTH IRAs at $6,000/year, or $500/month. Folks over the age of 50 are allowed to save $7,000/year.
If you've shoveled out of all your debt and have the wherewithal, definitely opt for $500/month because, in retirement, how long do you think you'll go on soaking up the sun and playing with your grandchildren? Twenty years? Thirty years? Well, in 30 years, if you earn $3,000/month, that's just over one million dollars. See why it's smart to start young and go hard?
Of course, $500/month simply isn't a viable option for many families. We love to play around with IRA calculators to see what's right for people. But, remember, the sooner you start, the more wiggle room you'll have.
If you're ready to start making waves in a retirement fund, then contact us today to open your very own IRA.
4. Hinder Your Healthcare Burden
Have you ever considered a health savings account (HSA)? It's a portable savings account that allows you to nestle away money for healthcare completely tax-free.
The money you deposit into an HSA rolls over each year, alleviating any sort of "use it or lose it" stress. It's completely controlled by you, not your employer and you get to call all the shots on how the money is allocated.
Some people liken HSAs to "medical IRAs." That is, you grow the account slowly over time and only take it out whenever you see fit. If, ten years down the line, there's a major medical expense, an HSA can help prevent you from sinking into tremendous debt.
But, even in the day-to-day as you're saving, there's an immediate benefit to an HSA. Whatever contributions you're able to deposit into your account, they're completely tax-deductible. If you work for a company that's willing to contribute, their contributions are not included in your taxable income, either.
These amounts are capped, however, at $3,550 for individuals and $7,100 for families. However, when you hit 55, you're allowed to squirrel away an extra $1,000, free and clear. If you think this is right for you, feel free to download our HSA application today.
5. Consider a Side Hustle
If you're ready, willing, and able to tackle debt and save more but simply don't have the finances for it, then make 2020 your year of the side hustle. In the days since the COVID pandemic, more and more people are starting to work from home. Is there something you can do on the nights and weekends from the comfort of your own home?
Sure there is! If numbers are your game, then you should know there's a real need for virtual bookkeepers. If organization is your talent, then you should also scan the online ads for virtual assistant positions.
If your fingers type as fast as fingers can go, then you may be able to work as a transcriptionist from home on nights and weekends. Teaching English online is another viable option.
Also, the almighty Amazon posts remote jobs to their Career Services page and customer service, as a whole, lends itself to the remote lifestyle. If you have time to binge watch Netflix, then you have time to earn a few extra hundred each month.
Long Term Financing Goals You Can Meet
Each of the goals listed above are considered long term financing goals because they can't be achieved with the swipe of a card or the deposit of a singular paycheck. But, that's okay! It's like planting a garden. You start with a tiny, little seed and then, over time, harvest six-foot sunflowers.
There's no way around it, you simply have to diminish your debt first. For some, that may be a three-year endeavor. And that's okay! This is a goal and it's not meant to be met in three or four months.
Then, once you get your personal savings and retirement plan up and running, you're truly going to feel wonderful. This feeling of satisfaction doesn't carry the same punch as a new pair of high heels or a new golf club. It carries a better punch because you'll be proud of yourself as you watch something grow.
If you're looking to start an IRA, money market account, personal savings account, or HSA, we hope you'll get in touch with us today! We'll pair you with just the right tool to meet your long-term financial goals.
Here at iThink Financial, we've built ourselves on this motto: people helping people. We're a credit union that fosters healthy financial management and wants to see our customers flourish, not drown in faulty debts and loans.
Come join us for any one of our webinars and seminars where we help people do just that! Whether you need to build a better budget, save for a home, or want to plan for financial crises, we're here to help you formulate the best game plan and use all the resources at your disposal.