3. Build an emergency fund
Emergencies occur with little or no warning. That’s why it’s important to set aside cash for those times when life zigs when you expected it to zag. Experts suggest having at least three months of living expenses available in a reserve fund. However, don’t let that overwhelm you – any extra amount that you start saving today will help in these situations. Consider opening a separate account for your emergency fund to keep you from dipping into it unnecessarily.
4. Pay off high-interest debt
Credit cards offer interest rates that can be very high, often more than 25%. If you have high-interest credit card debt, prioritize paying it down. Just imagine how good it will feel to see those account balances hit zero.
5. Make the most of your employer’s match
Most employers offer employer-sponsored retirement programs, usually in the form of a 401(k) plan. And many employers will also match your contributions (up to a set dollar limit).
This is, in fact, free money that you don’t want to leave on the table. The catch is you have to contribute the amount necessary to earn the maximum employer match. Check with your HR department to see how much you have to contribute each month to earn your employer’s maximum match.
6. Save for your golden years
In addition to participating in your employer’s 401(k) plan, you will also want to open an IRA account. IRAs let you set money aside for retirement and offer significant tax advantages. A standard IRA is funded with pre-tax income, meaning that you’ll have to pay income tax on it when you withdraw it. A Roth IRA is funded with post-tax income, which means your withdrawals in retirement will be tax-free. It comes down to when you want to pay the tax, but remember that since your income will likely be less in retirement, you could be in a lower tax bracket, meaning you could pay less in taxes overall.
Another way to save for retirement is to invest in stocks and bonds. How much you invest in each depends on two factors, 1) your investment horizon (how long you’re willing to wait before converting an investment to cash) and 2) your tolerance for risk. Generally speaking, the younger you are, the higher your acceptance of risk. That’s because, should your investment lose value, you have more time (i.e., a longer horizon) for it to recover its losses.
Creating a plan with realistic goals will make it easier to stick to, but even if you don’t hit each target for your budget and savings, having these targets to guide you will get you headed in the right direction toward your financial independence.