By Craig Erwin, Ph.D.
Start your new year off right. A new year is a great time for fresh beginnings. It is the perfect time to get your financial house in order; take stock, set goals, overhaul your plans, and start doing more of the right things.
First, you need to figure out where you are now and where you want to go from here.
Start by examining your spending. Where does your money go? First identify expenses that are paid automatically. Look at receipts and credit card statements to see what you pay regularly and what kinds of things you tend to spend your money on. It will be best if you track absolutely everything you buy for a couple of months so you can assess accurately where and when you tend to spend and what you tend to buy. My wife likes to use cash, so she would need to carefully track her spending manually because, for many expenses, she lacks a paper trail.
Next, review how you save. Are you saving anything? If so, how much? Are you saving a fixed amount weekly, saving sporadically, or not saving at all?
Now, make concrete plans to reduce your spending and increase your saving. Which luxuries do you consider necessities? What can you do without? What are you willing to give up in the interest of improving your financial security? Everyone spends on something that she can live without. Can you brew your own coffee or make your own lunch? Can you paint your own toes? Does your car really need a wash?
A dollar saved today (and invested) will be worth much more than a dollar in the future. To accumulate $1 million over 30 years by investing in the stock market (assuming 7% annual returns), you need to save and invest about $190 each week. Can you cut enough expenses to save $190 a week? If you are already saving $100 a week, then you just need to increase your weekly savings by $90.
A simpler and less painful way to achieve the same goal is to have your employer deduct $190 from your paycheck each week and deposit it into a stock mutual fund through your employer’s retirement savings plan. If your employer matches your contributions, you will be able to accumulate much more than $1 million. What a wonderful way to save for retirement! And all you have to do is work for someone that offers a retirement savings plan.
So, start the new year off with a bang. Let this be the year you change your bad habits and start spending in a more disciplined, less reckless, fashion. Let this be the year you start saving and investing enough regularly so that you can retire comfortably. If retirement is bearing down on you, let this be the year you save till it hurts. Let this be the year you finally organize your approach to saving and spending, developing a budget, tracking your expenses, and saving and investing religiously.
There is no reason that you can’t plan for the future and yet live a nice life. But, until you start saving and investing, there is very little at work to secure a bright, comfortable future for you. Only when you acknowledge how quickly the future will arrive and how critical it is that you prepare for it, will you invest in making your future the dream it can be. So embrace your future by taking the steps required today to build the future you want tomorrow. It all starts with saving. Until you start saving regularly, your future will be something to dread, not dream about.
For more information on how to prepare for retirement, watch this video and read this blog post.