Three Essential Steps for a Secure Financial Future

This may sound like something your father would tell you, but there’s truth in the saying, financial security doesn’t happen by accident.

Like most things in life, getting to a good place financially takes some planning. It doesn’t have to be complicated. Start by listing your financial goals, and then map out a strategy for achieving them, one at a time.

Ultimately, you’ll have to define your own goals, but I’ve listed several basics here that apply to most of us.

Step 1: Save for emergencies.
If you don’t have money standing by for the inevitable emergencies in life, it makes all of your other goals harder to achieve. Try to start with a short-term fund for small emergencies like a car repair or broken appliance. Later, work toward a long-term fund for bigger emergencies like lost employment or medical expenses.

How to build your savings:
One option is to figure out how much you want in the fund and then decide how much you can set aside for it each month. You might be able to work with your bank to have a set amount pulled into separate account so you don’t have to remember to do it yourself. Look for a high-interest online savings account for your short-term fund and look for higher-yielding options for your long-term funds.

It may sound silly, but even your spare change can help you reach your goal. Start emptying the change you have left over at the end of the day into a container, and at the end of each month, add it to your emergency fund.

You can bolster the fund further by fixing your household money leaks — overspending at restaurants, subscriptions for things you don’t use, over-priced services – and putting whatever you save toward your emergency fund.

Step 2: Pay down your debt.
This goal works hand in hand with the first one. Whatever you’re paying on debt and interest is money that could have been used for savings, not only for emergencies, but also for retirement and other goals. Debt also leaves you with less money for your basic expenses, let alone for the things you enjoy, and too much of it can hurt your credit score.

How to reduce it:
To trim back what you’re paying in interest each month, check the rates that each of your credit cards is charging and consider transferring the higher-interest debt to the card with the lowest interest rate. You also could take advantage of the many zero-interest and low-interest credit cards out there and transfer your balance to one of them.

Keep in mind, however, these transfers will affect your credit score. Make sure you’re transferring your balance to a card with a credit limit at least as high as your original card so your debt percentage (how much you owe versus credit available to you) doesn’t work against you. Too many credit checks can harm your score, too. If you’ve already made some transfers, it might be better not to make another.

One effective strategy is to pay at least minimum payments on all of your cards – except the card with the highest interest rate. Focus on paying off that card as quickly as possible. When you get that balance paid, you can use the same approach on the next card, and you’ll have even more money free for the payments.

Step 3: Invest for your retirement.
Regardless of your age, you need to be doing this to protect your long-term financial security. In fact, most of us today can expect less help from pensions to help us after retirement, the risk of inflation that will cut our buying power, and the likelihood of longer lives than generations before us. Those factors make personal investments more important than ever.

How to get started:
Online retirement calculators are a good starting place when you’re trying to figure out how much you’ll need for retirement. Basically, you’ll want your retirement savings to provide 70 to 90 percent of your pre-tax, pre-retirement salary. You also should look at your recurring expenses, including your savings contributions and debt payments, so you can create a post-retirement budget. From there, you should have a rough idea of how much money you’ll need for retirement.

A tax-favored retirement account like an individual retirement account (IRA) or 401(k) is a good starting place. Most let you defer taxes on the money you save and the account’s returns. If your employer is willing to match your contributions, make full use of that benefit.

Consider investing in more than one kind of account. To build what you’ll need, look at some higher-risk options, like stocks, combined with safer options like bonds. A certified financial planner can offer guidance here.

Creating a financial plan is an important accomplishment – but it is possible! Just remember that reaching your goals will be a process, and there probably will be some setbacks along the way. Life happens. Be patient, and keep working toward your goals!