The financial juggling act: Prioritizing all your needs
How do you keep everything on track when you’re juggling multiple financial demands? It just takes a little planning and prioritizing.
At almost every point in your life, you'll grapple with competing financial demands—the furnace breaks down, the car needs new tires, taxes are due, and so on. The trick is not to let life's inevitable expenses get in the way of saving for retirement.
"What you're doing is building a foundation for your future," says Robert Payne, senior financial services representative with Principal® in in Greensboro, NC. "And the foundation should include saving for retirement, creating an emergency fund, and getting out of debt."
Build an emergency fund.
To prepare for the unexpected, start by accumulating at least 1 month's worth of income in your account, then work toward a goal of keeping at least 6 months' worth of living expenses readily available.
"Also consider adding life insurance and disability insurance to cover you if something bad happens," adds Payne.
Payne suggests earmarking 10% of your paycheck for your emergency fund until it's sufficiently funded, adding more as your pay and living expenses increase. And whenever you tap the fund, make rebuilding it a priority.
Keep saving for retirement.
Funding retirement is every bit as critical as building an emergency fund—and the most common mistake people make is waiting to save.
"Few things in life have the impact of compound earnings," says Payne. The longer your funds have to grow, the more you may have available to you in retirement, he adds.
Consider setting a goal to contribute the maximum amount to your organization's retirement plan–or at least the maximum necessary to receive the full employer matching contribution, if that's available. And if you've fallen behind and are age 50 or older, look into making catch-up contributions to your retirement plan (if that feature is available) or opening an Individual Retirement Account (IRA).
Start saving as early as possible, and set your contributions to be automatically payroll-deducted.
"Continue to increase your contribution each year over time," suggests Jeri D'Lugin, JD*, CLU®, AEP®, senior financial services representative with Principal® and Payne's business partner. "Most people won't notice much of an impact on their budget, but it has the potential to add up."
Reduce high-cost debt.
You'll probably have car and home payments for most of your life, but you can eliminate credit card debt and other high-interest debt. Whenever possible, pay more than the minimum due to wipe out this debt more quickly. "Getting out of debt gives you a cushion," says Payne. "It gives you the choice to purchase rather than to finance."
Budget for future expenses.
Once your emergency fund and plan for retirement are on track, set something aside each month for foreseeable expenses, such as a new roof or a special vacation. One way to "find" that extra money: whenever you pay off a car or other installment loan, continue putting the same monthly amount into a savings account, so you'll be ready for the next big expense.
Contribute to a college fund.
You may choose to open an education savings plan or a Roth IRA to save for your children's or grandchildren's college costs. But always put your own savings first, says Payne: a student can often find financial aid for college, but there are no loans available to pay for your retirement expenses.
And when it comes time for your child to apply for financial aid, "keep in mind that funds in a retirement plan won't count in assessing his or her financial need," he adds. "That may make more funding sources available for college."
*JD is an educational degree and the holder does not provide legal services on behalf of the companies of Principal Financial Group®.