In part one I mentioned the steps I took to get out of debt. Part two concentrates in building an emergency fund and laying a foundation for a comfortable retirement. I never really thought about retirement before because it is so far away. Now I realize I was just wasting time and money. You might not be thinking about retirement either but you’d be surprised how fast time flies. I mean look at me, I know I look good and all but I AM 33 years old already!
Three to six months emergency fund
Paying off your debts might take time depending on how much you owe and how much you are able to pay each month. It took me less than six months but I put every single extra penny that I had into my debt. Hopefully you will too. How ever long it takes doesn’t really matter, the point is that now you should have zero debt, except for the mortgage if you have a house.
Now it was time to pour all that money I was using to be debt free into my savings. I saved 3-months of expenses. The emergency fund could be more depending on your situation. I am single, my job is pretty stable for now, I don’t have a mortgage, I don’t have kids and I don’t have any dependents, so I have 3-months worth of expenses but am working on having at least six months saved. If you have a house and are the main provider for your family maybe 6-months to a year should be your goal.
Even though the latest jobs report looks promising, there are still a lot of people getting fired from their jobs and some have been unemployed for more than 6 months. Make sure you are covered to pay the bills for at least six months in case you lose your job. And just because your credit cards are now at zero does not mean that you can use them in case of emergencies. Credit cards are only to be used to if you know you’re going to pay off the balance each month and to keep your credit healthy. I use my credit cards for groceries, gas, and things that I have a budget for. If I don’t have the money already saved up for a particular item then I don’t buy it until I save enough to pay it off right away.
Your emergency fund should be easily available to you but not in your checking account. If you don’t have a savings account that is paying you interest then make sure you get one. I had a savings account that was only giving me 0.01% APY so I switched my savings to my company’s credit union which pays me almost 0.9% APY. Rule #1 of building wealth: Save some of what you make; Rule #2: Make your money work for you and earn you more money.
Build up your emergency fund!
Save for retirement
I’m going to combine the 401(k) and Roth-IRA here because they are all saving for retirement. Please note that when I say 401(k) I am also including 403(b) plans. 403(b) plans are offered by public schools and certain 501(c)(3) tax-exempt organizations. Most of us have 401(k) plans and if you don’t, then you should open a Roth-IRA stat.
When I went through the New Employee Orientation at my first real job right out of college, I had to decide how much I wanted to save in my 401(k) plan and where I wanted to allocate my money. Since I didn’t know anything about investing and all I heard was how you can lose your money in the stock market, I chose the safest place for my money…a money market account. Little did I know that I was losing money to inflation. Money market accounts pays interest based on current interest rates so if interest rates are 1% but inflation is 3% then I’m losing purchasing power by 2%.
The New Employee Orientation welcome committee explained that the company contributes 3% of my salary to my 401(k) and they would match up to 2% more as long as I contributed at least 2% of my salary. I started contributing 2% to get the match plus the 3% the company was giving me for a total of 5%. I did that for about 4 years and then my company merged with a different company. The 401(k) company match policy changed with the merger. Now I had to save at least 6% to get a 4.5% company match, but since I was living paycheck to paycheck this amount was too much so I left it at 2%.
As a rule of thumb you should save at least 15% of your salary for retirement to have a chance to live on 70% of your salary for 30 years when you retire. Social Security, if still around, could cover the rest. I was saving 5% including the match, oh boy. At this point, I am debt free and have the money to save for retirement so I decided to save as much as I could. I started by increasing the contribution to my 401(k) to 6% so I can get 4.5% company match. That is what you call free money and I really wish I was doing this earlier. But even with the match I was only saving 10.5% of my salary so I decided to open a Roth-IRA for the rest. There is a maximum contribution for the Roth-IRA so I made sure I met it and now I am saving more than 15% for retirement. I will probably have to catch up a little bit but it’s not too late. It’s never too late to start as long as you do it.
Don’t worry if you don’t know where to start, I was in the same boat. After doing some reading I was able to better understand what to look for when choosing my retirement investments. I will share everything that I have learned with you and try to explain it to the best of my abilities in later posts.
More
I was able to do all this and save for an engagement ring for my girlfriend in one year! Everybody’s situation is different so it might take you more or less time, but the point is that you have to start and you have to start right now.
I know I’m saying to have a budget and save, save, save, but it doesn’t mean that you shouldn’t also enjoy life. A budget, when done properly, should include money for the activities and hobbies that you love. I like rock climbing and going on vacations so I made sure that some money was allocated to those activities. I went to New Orleans, Costa Rica, Portugal and Spain this past year while also saving and getting rid of debt because it was all included in my budget. I cut down on unnecessary expenses to make sure that I have enough money for the things I love to do. I also have a category labeled “Things for me” and I allocate $50 a month there. I know $50 doesn’t get you much but you also shouldn’t be spending that money every month. Wait until you have $200 and get yourself something nice. I also wait at least 24 hours before buying something that I think I want. It makes me think, I don’t really need a Pogo Stick, I’m over 30 years old! Impulse buying was a habit of mine and by sleeping on it for 24 hours it dramatically decreased the amount of stuff that I buy. Remember that a budget is set-up by you and for you.
I still have more steps to take to be financially secure and I know it will take time, but time is all I have right now. Time and knowledge.
Do you have an emergency fund? How are you making your money make you money? Are you taking advantage of your retirement plan at work, if you have one? Please leave your comments below and let’s start a discussion.
Almi
Great primo, once again. Great tips. Never knew about the 15% rule. Also to ask, we had a 401k and IRA with my husband last job. We transfered to our new bank because he no longer works there. The problem is that neither of us is offer either benefits on our currents jobs, how can we do to invest we already have and to continue to save up in those accts?? Thanks primo
Aldo
Almi, you can roll over the 401k into an IRA of your choosing. You will have to make a few phone calls or you can check online. Vanguard and Fidelity have pretty good funds with low expense ratios and a lot more options to choose from than your old 401k. See who’s handling your accounts and see if you can roll over your 401k into an IRA or Roth-IRA with them. If you roll over to a Roth-IRA you will have to pay taxes though but it might be a better option depending on how much money you have in the account. Research “rollover a 401k” and you will find a lot of information. Just make sure you pick funds with low expense ratios, under 0.5% if possible. Expense ratio is the amount they charge you for managing your fund, the lower it is the less you pay. I can show you what to look for if you want when you are ready. Just find out where you have your 401k and look into rollover first.
Francis
We’re pretty much insync about the steps you have taken for your retirement plan. I’m taking advantage of my employer constribution so I’m contributing about that much in my 401k. I have also my pension plan thru my union. I’m also contemplating investing on a ROTH-IRA, but have not make a decision yet. Great article.
Ps. About credit cards, I always paid them in full at the end of the months. I refuse to pay interest, not to say that I haven’t, but in a very few occasions.
Aldo
Francis, you should really look into Roth-IRA. You invest your after-taxes money but it grows tax free! You don’t have to pay taxes when you withdraw your money and there is no penalty in withdrawing the money you invest. You just can’t withdraw the growth until you are 59 1/2. Think about it, it’s a good plan.
Kate
I second the Roth-IRA. The only “limitations” to the Roth-IRA are that (1) you have to file taxes jointly instead of separately if you are married, and (2) you can only contribute up to $5,500 (check the IRS guidelines), but having tax-free growth is awesome. I am maxing out my Roth-IRA (and only contributing the minimum necessary to the 401k to get the company match) because I would rather contribute after-tax money now to withdraw tax-free later on, and also because I want to be able to withdraw the money I invested before I’m 59 1/2, without any penalty, unlike the 401k.
Elena Weinstein
Ah, I ‘m still confused about it. I’ll need a private consultation – you or Aldo…