Nobody wants to enter retirement while still having debts. Here are some tips to come out ahead.
The recent recession — and subsequent slow recovery (some may say “ongoing recession”) — has caused millions of Americans scrutinize more closely the concept of living within their means. If we are prepared to own up to our financial realities, the first step is to create an action plan. Here are some critical thoughts to keep in mind:
Track Your Spending Like a Bloodhound
It’s difficult to reduce spending if we aren’t sure how much we are spending in the first place. Try keeping track of typical monthly expenses for three months to find out where your money is really going. Include some unexpected expense zingers — such as home repairs and automobile malfunctions, to create a more realistic scenario. Once you have a solid record of typical monthly spending, compare average monthly expenses with monthly income. If there is a surplus, this is the amount you can apply each month toward retiring debt or increasing savings. If you have a shortfall, it’s time to re-examine expenses more carefully to see what your household can potentially reduce or eliminate
Don’t Stop Saving!
A great way to build good saving habits is to make saving even easier than spending. Establish separate savings accounts with separate goals attached to them. Here are three suggestions to try:
• Emergency Fund: The objective for this account is to accumulate at least three to six months of living expenses. If something drastic happens, such as losing a job or a major mechanical or household malfunction, you can avoid raiding your other savings or run up more debt. Stop funding other savings accounts until you have at least 3 months of emergency expenses set aside.
• The Family Fund: This account can help family vacations or school field trips, summer camp, etc.
• Investment Accounts: These are reserved for long-term saving goals that are typically 5 or more years in the future. Hopefully, you already have a retirement account (such as a 401(k) at work or your own IRA) and perhaps a college savings plan. Retirement and college do not have to be your only long-term goals, however. Perhaps you’ve toyed with the idea of dumping a lousy 9-to-5 job that isn’t going anywhere in favor of starting your own business. Maybe you have plans to give your home a major make-over. These can be smart long-term goals, if you set aside sufficient funding beforehand.
Keep Your Friends Close and Your Credit Cards Closer
If you have piled up a significant amount of credit card debt, you must first end the bad behavior. Paying off debt is much easier once you stop adding to the problem with credit card purchases.
• Pay off the credit card debt with the highest interest rate first, and avoid paying only the minimum balance. Alternatively, pay off the smaller balances first, then roll these payments up into ever increasingly larger monthly payments that you apply to the cards with larger balances. This “debt snowball” approach has the added psychological boost of seeing fast progress as you pay off balance after balance.
• Pay off or transfer out balances for all cards except for the one that has the lowest interest rate.
• Establish a realistic payment timetable and stick with it, no matter what. If you still have trouble keeping ahead of payments, it is time to speak with a credit counseling professional. The counselors at the nonprofit National Foundation for Credit Counseling may help you create a more structured plan. To find the nearest location, call 800-388-2227 or visit http://www.nfcc.org.