A Blueprint to Prioritize Your Personal Finances
Money Girl gives you a step-by-step blueprint to prioritize your personal finances. Use these 5 financial priorities to help set goals, leverage your resources, and build wealth as quickly as possible.
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A Money Girl Podcast listener named Jacob says:
"I’m in my mid-30s with two kids and making a good salary. I have an emergency fund and some retirement savings. But I’m struggling to finish my budget because I have so many competing needs and goals.
For instance, if I pay off $75,000 in student loans first, I won’t have any money for a house down payment. I wish that I could fund all my dreams, but I have to make choices. I’m so motivated, but I need help figuring out what to do first, or in the proper proportion.
So which line items should I prioritize, student loans, saving for a house, retirement, college for my kids, or family expenses like summer camp and a vacation?”
I’m sure you can relate to Jacob’s dilemma because we all have limited financial resources to manage. If you don’t know the next action step to take, it’s easy to feel stuck and never make any financial progress.
In this episode I'll give you a step-by-step blueprint to follow so you know exactly how to prioritize your personal finances. These five financial priorities will help you set goals, leverage your resources, and build wealth as quickly as possible.
Free Resource: Laura's Recommended Tools—over 40 of the best ways to earn more, save more, and accomplish more with your money!
Financial Priority #1: Fund your retirement
When it comes to budgeting and saving for the future, you need to begin with the end in mind. Unless you’re expecting an inheritance or a huge company pension, your longest-term goal should be to save enough for a comfortable retirement.
After you stop working you could, and hopefully will, live for decades. Whether you’ll live in poverty or have financial freedom is completely up to you. Social Security payments for the average retiree are just over $1,000 per month. And who knows what could happen to that program in the future.
The earlier you begin saving, the better. Not only does starting early give you more time to contribute money, but it leverages the power of compound growth. Compounding is when your earnings earn their own earnings! Your account balance can easily mushroom as the growth you receive provides even higher returns.
Consider this: If you invest $500 a month over 20 years for a 10% average return, you’d have about $380,000. If you started five years earlier and invested that same amount for the same return over 25 years, you’d have over $665,000.
But if you invested for 30 years, you’d end up with an impressive nest egg that’s over $1.1 million! Did you get that? Simply starting to invest 5 years earlier can give you an additional $435,000, even though you only put in $500 per month. Procrastinating even 10 years could make the difference between scraping by or have a comfortable lifestyle down the road.
So, how much retirement savings is right for you? There are many online retirement calculators that can to help you drill down to an exact number to save in order to reach your goal. The AARP Retirement Calculator and the Vanguard Retirement Calculator are two good resources.
But a good rule of thumb is to never invest less than 10% to 15% of your gross income. For instance, if you earn a $50,000 salary, be sure to invest from $5,000 to $7,500 per year. As I mentioned, if you do that consistently over several decades, you can easily retire with at least a million dollars.
If you have a retirement plan at work, such as a 401k, 403b, or 457, that’s the first place your savings should go. For 2015, you can contribute up to $18,000 or $24,000 if you’re age 50 or older.
Matching funds are so fantastic because they give you a 100% return on your money no matter what happens in the financial markets.
Not only are workplace retirement plans convenient, because they automatically deduct contributions from your paycheck, but they come with terrific tax benefits.
Plus, many employers give you matching funds that can turbocharge your savings. Matching funds are so fantastic because they give you a 100% return on your money no matter what happens in the financial markets. I don’t know about you, but I’ll take a guaranteed 100% return all day long!
But what if you don’t have a job with a retirement plan? In that case, you can use a traditional IRA, a Roth IRA, or a special account if you’re self-employed, that also come with nice tax advantages.
The maximum amount you can contribute to an IRA isn’t as high as a workplace plan, but it’s likely to increase in future years. For 2015, you can contribute up to $5,500 or $6,500 if you’re age 50 or older.
If those amounts are less than 10% to 15% of your gross income, max out an IRA and contribute the rest to another account. You might choose an annuity for pre-tax savings or a regular, taxable brokerage account.
You can even max out both a workplace plan and an IRA in the same year. However, depending on your income, contributions to a traditional IRA may not be fully tax-deductible when you, or a spouse, also participate in a retirement plan at work.
No matter what type of account you use for retirement savings, automate it. Set up monthly transfers from your bank account so you fund your future before anything else. Nothing is more important.