Beginners Guide To Saving for Retirement

August 20th, 2008  |  Published in General  |  2 Comments

Developing a productive savings plan is something that anyone can afford, even if you think your budget is already stretched tight enough. Regardless of the amount of money you are currently left with at the end of the month, a savings plan is something that is essential to every household and really needs to be developed. There are multiple ways that can accomplish the same goal: a savings that becomes something substantial. Without a savings plan, you could be caught unawares by emergencies or might be left unable to do any real investing into your future. No one wants to work into their old age or to depend on state aid or other types of minimal payments.

Establish a Budget

The most important first step is to establish a budget for your family or household. Without a budget, it is impossible to determine what can be put away towards savings and what exactly your household or family is spending. Through the use of a budget, you can then determine what of your income can be applied to savings with the goal of insuring a stable and comfortable retirement. A budget should include all of the monthly expenses for a household or family, such as mortgage/rent, utilities, car payments, credit cards, student loans, insurance payments, or other costs. It is important to also include expenses such as gasoline, entertainment, clothing, groceries, and other miscellaneous expenses.

Once you have determined a budget for your family or household, the next step is to try to determine the cost of living expenses that will be expected during your retirement. It is far more important that you just come up with a ballpark figure than it is for you to spend time, frustrated, trying to come up with an exact amount.

Once you have come up with a clear estimate of the funds you want available during your retirement, you must set up a game plan for acquiring them. The first step is to calculate what, if any, of this can be derived through the use of Social Security benefits, pensions, 401(k) plans or other means of maturing funds. It is important to use a conservative estimate when calculating what these sources will be able to supply you with during your retirement; it is better to plan for too little and end up with too much.

Now that you have a rough estimate of the financial means that will be necessary during your retirement, it is now time to plan on achieving those financial goals. The simplest and most functional part of a savings plan begins with the 10% rule. The 10% rule means that it is essential, if you are to take your savings seriously, to save a minimum of 10% of all income. This is referred to as ?paying yourself;? without this, there will be no capital for your future.

The 10% that you are paying to yourself through time is often much less then you would think and yet it becomes something that can be invested to grow even faster. An average household with a yearly income that has a 10% savings plan would put over six thousand dollars into a savings account. This money, since you know will not be necessary for month-to-month necessities, can be put into high yield bonds, CDs, high interest rate savings accounts or other investment options.

One way to force the 10% rule upon you and your household is to set up an automatic payroll deduction. You can have the deduction go directly into a separate high interest savings account. If you set up predetermined times for withdraw, then you can often get much higher interest rates, and thus earn more from your money. With the funds automatically placed into a savings account, it is much less likely that you will spend the money as it is not as readily available. This is especially a good idea for beginning a savings routine.

An auto debit system creates a habit out of savings and helps make saving for your future a regular part of your routine life. It is just as important to try and increase the monthly contributions on an annual basis. Once you become comfortable with 10% savings, try to increase it to 15%. In a matter of a few years, this money will begin to take on staggering amounts. If you have loans with an interest rate, it is more important to increase these payments than to increase savings, but it is equally as important not to acquire any additional loans. The money lost on interest payments or the cost of being financed can make the difference between a successful retirement plan and an amazing retirement plan.

Bonds are a particularly good choice for long-term investors because they play the role of financial instruments to increase the interest earned on savings. Government bonds are risk-free and can play a large role in a family or household savings plan. Another common form of household investment is TIPS (Treasury Inflation Protection Securities). TIPS are securities issued by the U.S. Government. They carry the government?s full faith and credit backing for greater security overall. The value of TIPS is directly affected by the Consumer Price Index; this is a monthly measurement of the price for a fixed amount of goods and services.

An additional step towards an overall comfortable savings environment has to do with your tax refund. This is usually money that is not (or should not be) budgeted into bills or other expenses. This money is usually something that comes as a financial surprise to most families and households; the money was expected, but was not required for any bills or upkeep payments. If the money received through a tax refund was applied to either making an additional payment towards your principle balance on a mortgage loan or an additional credit card payment, you could save thousands of dollars in savings over the course of the loan.

It is simple steps like this that separate smart consumers from those trapped in debt. One of the key points of developing a strong savings plan is in reducing debt. If the money applied to interest related loans could be put into savings accounts, then family savings would skyrocket, and a stable financial future would be certain.

  

Responses

  1. The Boomer Chronicles » Blog Archive » Friday Links Variety Show says:

    August 22nd, 2008 at 8:29 am (#)

    […] I know some of you have not yet started saving for retirement. Here’s how to kick off your retirement saving. […]

  2. Carnival of Personal Finance #167 - Highlights from the Beijing 2008 Olympics — Broke Grad Student says:

    August 25th, 2008 at 7:07 am (#)

    […] Beginners Guide To Saving for Retirement […]