How To Start Saving For Retirement

Last week we talked about Generation X and the tendency for them to be the overlooked generation. We also established that the average Gen Xer was rather ill-prepared for retirement relative to their stage of life. If you missed that blog post you can read it here.

For those of you that felt uncomfortable thinking about your own situation in planning for retirement, this week we want to help you establish what should be an area of focus in planning for retirement.

Retirement can often seem like a distant mirage, but rest assured, it has a tendency to sneak up on a person quite quickly. So, here are some practical steps to ensure that you are on the right track:

Review and monitor finances over 3 month period

If you have access to a spreadsheet like Microsoft Excel or Google Sheets, start tracking exactly where all your money is going for three months.  Break down your expenses into categories; fixed expenses like mortgage/rent, car payments, insurance, etc, and expenses that can vary and potentially be cut out altogether. Variable expenses would be: food, entertainment, travel, etc. Understanding where your money goes allows you to see what portion of expenses you can’t do without, and gives you a starting point to develop a detailed budget.

Budgeting is often thought of as something that university students do. However, budgeting is not just for the cash-strapped. Many of the most successful people keep an extremely detailed and disciplined budget. Monitoring expenses over a longer term helps keep you on track with their long-term goals.

We do suggest tracking expenses over 3 months at a minimum. It is a significant period of time to understand your general spending habits, and if it is multiplied by 4, it gives a better estimate of your annual expenses.

Set obtainable goals and be consistent

Once you have a basic understanding of your monthly cash flow, you can see how much money remains at the end of each month for saving (for everyone’s sake I hope this is always a positive number). Let’s say at the end of each month there is $500 extra, which means at year-end about there will be about $6000 that could be directed to savings.

In theory, it would be ideal to put away that full $6000 each year. However, unexpected expenses do occur and it might be tough for someone to put away that full amount every year.

Set a goal that is obtainable. If you know you can do without that extra $200 a month, that may be a good starting goal. I’ll say it again, obtainable goals are key, set a goal that you can achieve every month without question.

Pay yourself first (60/30/10)

We often hear people say that they don’t have leftover money at the end of the month to put into savings. Many of these people just don’t know if they have extra money or not.

If those same individuals were to monitor their expenses and eliminate needless expenditures, I’m certain they would find a few extra dollars. Once a person knows how much they can put away each month try putting it away at the beginning of the month, or including it in your “fixed expenses”.

A good rule of thumb for saving is the 60/30/10 rule. 60% of your income generally goes towards fixed expenses (i.e., mortgage/rent, car payments, phone, internet, etc). Things that are constant and need to be paid each month. 30% of income is generally for floating expenses (i.e., groceries, gas, entertainment, etc). These are costs that change month to month and are generally less consistent. Lastly, 10% of your income should be set aside for savings.

Of course, there are always exceptions to this rule. With very large incomes 60% might be too high for monthly fixed expenses. If you’re young (especially living at home), there might be more than 10% left to save each month. If a person is older and still hasn’t saved for retirement, their rule of thumb should maybe be more in the 40/30/30 range.

Start as soon as possible

Budget, check. Set attainable goals, check. Pay yourself first, check. Now what?

The sooner you start saving, the easier it will be. Start as soon as possible, even if it is just a little each month.

There is a wonderful concept called compounding interest, and it’s here to help. Compounding interest takes your savings and grows them over time with no extra work done by you. The sooner you start saving, the sooner you can take advantage of compound interest, and meeting your goals will become just a little bit easier.

To get started planning ahead and saving for the future, you should talk to a financial advisor. A good financial advisor will help create a detailed plan and help you obtain your goals in the most efficient way. If you don’t have a financial advisor read one of our previous blog posts here.

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Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy.