Step 1: Establish an Emergency FundCreate an emergency fund. Many experts recommend having enough to cover three to six months of living expenses. Even small amounts add up surprisingly quickly: for example, if you save $20 a week, you’d have $1040 in a year, before counting any interest.
Step 2: Estimate Your Retirement NeedsA good next step is to estimate your retirement needs. One rule of thumb is to plan on a nest egg of 80% of your pre-retirement income minus social security and pensions. Some experts even recommend you estimate higher, because you may want to do travel extensively or take up an expensive hobby. However, a 2014 survey by T. Rowe Price found that retirees are living on less than 66% of their pre-retirement income, and 57% feel that they are living as well or better than when they were working. Having more time to shop efficiently and to do their own small tasks makes saving easier. Individual variables impact how much you will need but using these rules of thumb can help you determine an estimate.
Step 3: Add Saving for Retirement to Your BudgetPlanning and saving for something that is several years away can seem daunting but you don’t have to do it all at once. Add saving for retirement to your budget. With a $5,000 principal, if you saved and contributed $100 per month to a mutual fund for the next 30 years, and the stock market continued to earn its historic average of 8%, you would accumulate over $186,000.
See if you are part of a pension plan at work. The amounts it would provide can go into your retirement saving calculations. Set up an Individual Retirement Account (IRA) which allows your savings to grow un-taxed until distributed. Be sure to put in enough to maximize your company’s matching funds.
Step 4: Buy a HouseEnjoy the benefits of home ownership. In addition to the freedom to modify it to meet your desires, it is a major investment that provides the benefits of tax deductible interest payments and equity appreciation. Even better, the gain in your home equity is not taxed unless it is huge. The Taxpayer Relief Act of 1997 modified the tax rules so that you can now make a profit of $250,000 as a single owner (or double that if you’re married) without being subject to capital gains taxes. And there is no limit; you can make these tax free profits each time you sell your home.
Step 5: Enjoy Your LifeDevelop your bucket list. You may want to tour Europe, go sky diving or swim with dolphins. You may have college to finance. Estimate how much these items will cost. Set up diversified investments to meet these goals. Determine if your spending aligns with your goals. Reallocate when you find mismatches. A lower cable bill could free up money for bucket list items or long-term investments.
It’s not all about cost-cutting. Think of some ways to increase revenue, such as taking on part-time work or selling unused items.
Use these five steps to see your goals become realities!