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You've done it. You've worked hard, scrimped, saved, and paid off all your debt. Congratulate yourself as you have now joined an elite club of folks who have finally seen the light AND did something about it. But now that you can turn the page on that goal, what's next? Are you going to Disneyland or getting yourself a treat? Oh, wait a minute. You're facing a new chapter in your financial life, so it's time to set goals. So, now that you are finally debt free, what ARE you going to do?
For starters, you can set yourself up for the now and the beyond. Financial experts believe that the true key to financial health is zero debt, an emergency savings fund in a top savings bank and a sound plan for saving for retirement. You have mastered step one. Now it's time to begin focusing on the future.
Goals to Set
The easiest way to set up an emergency fund is to determine how much money you are now spending monthly in order to stay afloat. This calculation should include your mortgage payment, utilities, groceries, gas, and anything else you can't live without for a full 30 days. Now, take this figure and multiply it by 6. This is the minimum amount of cash you should have in your bank account to cover unexpected situations such as job loss, illness, etc. Now, many financial experts have started telling their clients that six months, while adequate before the recession, is now the minimum amount of cash you need to have stashed away, so saving more will always help. It may be a good idea to use budget management software to track your finances so that you can get a tighter rein on things.
Saving for this emergency fund is also pretty easy, even if you are still in debt payment mode. Once you've vanquished your debt, you'll have additional disposable income to do as you wish. Instead of spending all the extra funds on a bunch of stuff you don't need, start funneling the money into a traditional account or online savings account. The same payments you were making towards your debt may now be routed towards your savings. You'll never miss the money and, if you're like most people, this payment should be significant enough to help you reach your goals in as little as one year or less. If your monthly installments aren't as significant as you might like, try increasing it a little bit at a time, or simply be patient, but under no circ*mstances should you decrease or forgo making this contribution. Remember that slow and steady wins the race.
Next, you need to start looking into retirement savings accounts. Retirement savings accounts go above and beyond traditional savings accounts when it comes to making your money work for you. Thanks to its tax-friendly properties, retirement savings accounts allow your money to earn a greater return than simple savings accounts, making sure that you have the most money you can possibly have when it comes time for you to retire. When you think of retirement accounts, your mind might automatically wander to IRAs.
A traditional IRA is a good retirement investment account. You can make regular contributions up to the annual limits and in most cases, tax breaks apply to the money you put in. But, traditional IRAs aren't the only way you can save money for retirement. If you are fortunate enough, the company you work for will have a 401(k) retirement plan. You can make tax free contributions, which your company may match. And folks, this is free money. I urge you to take advantage of your company's 401(k) if your employer contributes anything at all. A 401(k) also has unique features like a low-interest loan feature that allows you to pay yourself back (although borrowing this way is something you need to evaluate very carefully) — you even get to keep the interest!
Other retirement accounts include a Roth IRA (which works somewhat like a traditional IRA with other benefits), Keough Plans, and a few others. If you are confused about what product works best for you, sit down with a bank representative and talk the talk. Don't be shy about asking questions. If you can't get satisfactory answers, go somewhere else. And don't forget that it's never too late to start investing. Here is some retirement investing advice.
While these are big savings goals to think about, there are also others that may be in your sights, such as saving for college or saving for big ticket items. When you've retired your debt, you'll need to prioritize the new goals you have before you.
It may take you a year or even longer to fulfill these goals, but they are the building blocks of having a solid financial future.
